Steelmakers Discuss Merging

The U.S. steel industry, battered for decades by aggressive foreign rivals, is discussing a sweeping consolidation--engineered by USX-U.S. Steel Group--that could combine several major producers into one company.

But the industry wants the U.S. government to pick up some of the tab for retiree pension and health costs, which could run into billions of dollars. The federal aid and possible challenges on antitrust grounds could pose political hurdles.

Talks are centering on five companies, which combined would be three times the size of the current U.S. Steel. Backers say it would give the domestic industry the clout it needs to compete with foreign suppliers.

“Our vision is to develop a growth-oriented, world-competitive steel company with a global reach,” said Thomas J. Usher, chairman of U.S. Steel parent USX Corp., in a statement.

Pittsburgh-based U.S. Steel, Bethlehem, Pa.-based Bethlehem Steel Corp. and Wheeling-Pittsburgh Steel Corp. of Wheeling, W.Va., confirmed Tuesday that they are participating in talks that could combine as many as five U.S. steelmakers into a single company.

Officials from those three firms would not disclose the names of other steelmakers involved in the discussions. But industry sources say -Mishawaka, Ind.-based National Steel Corp. and LTV Corp. of Cleveland also are being courted. National and LTV could not be reached for comment.

Robert Miller, chairman and chief executive of Bethlehem Steel, said in an interview that the new company would give the United States a player with the size and clout to compete effectively in a global industry being swept by consolidation.

Japanese rivals NKK Corp. and Kawasaki Steel Corp. agreed to an alliance this year, and three European firms are involved in a pending deal to form the world’s largest steel company.

“There are compelling economies of scale in this business,” Miller said. “We’ve got to get with the program and create a good, strong, healthy competitor.”

But he said the resounding financial weakness of the U.S. industry makes consolidation impossible without government help and union concessions. Since 1998, 25 of the nation’s approximately 50 steelmakers have filed for Chapter 11 bankruptcy protection--including Bethlehem, the nation’s No.3 steelmaker; Wheeling-Pittsburgh; and LTV.

U.S. steelmakers blame worldwide overcapacity, plunging prices and illegal dumping of cheap imported steel for their woes. In fact, the International Trade Commission ruled in October that foreign imports have harmed domestic steelmakers. The agency is poised to recommend remedies this week that could include tariffs or quotas.

One of the biggest challenges facing the U.S. industry is so-called legacy costs--the billions in retiree pension and health-care liabilities weighing down their balance sheets. At its peak in the late 1970s, the industry employed about 580,000 workers. Today, that number is about 142,000.

Michael Gambardella, senior metals analyst at J.P. Morgan, estimates the top five U.S. steelmakers alone face unfunded pension and health-care obligations in excess of $10 billion.

Gambardella warned that a huge federal aid package could be viewed as a bailout. He said the government may have a role to play, but said any assistance that doesn’t require the industry to rid itself of inefficient plants and excess capacity is doomed to fail.

“You’ll have a dozen other industries at the door with their hands out,” Gambardella said. “But you won’t have solved the underlying problem.

Miller said no deal will be possible without federal assistance. Though he couldn’t give a precise figure for the ultimate cost to taxpayers, he acknowledged it would be in the billions of dollars. He also decried the notion that Big Steel is seeking a bailout.

“There is no money going to any [steel] company,” Miller said. “This isn’t like the freebie that the airlines got” with the recent transportation bailout.

U.S. Steel said Tuesday that any merger deal also would require “a progressive new labor agreement that would provide for meaningful reductions in operating costs.”

Leo W. Gerard, president of the United Steelworkers of America, said the union was ready to talk with producers about any restructuring plan as long as it preserves jobs. The union says more than 27,000 steelworker jobs have been lost since January 1998--nearly 11,000 of them in the first seven months of this year.

In Washington, White House spokesman Scott McClellan said the Bush administration would listen to proposals from all sides of the issue but hadn’t seen details of the plan. He pointed out that there were differences of opinion on whether to proceed with such consolidation coming from various elements of the steel industry.

He said the administration’s policy remained unchanged since President Bush announced in June that he was asking the U.S. International Trade Commission to investigate whether foreign steel companies were competing unfairly in the United States.

He asked U.S. Trade Representative Robert B. Zoellick to begin negotiations with the aim of eliminating inefficient, excess steelmaking capacity around the world, and to eliminate market-distorting subsidies.

To pass antitrust muster, the steel companies must show that any new company will not dominate its market, said Eric Talley, a USC law professor.

To do that, they probably will argue that the market is the world, making a consolidated U.S. company’s share look like “little potatoes,” he said. But if the steel companies get the trade restrictions they are seeking, they may lose the argument that they are actually competing against foreign rivals.

U.S. steelmaking capacity is about 126 million tons a year, according to figures form the American Iron and Steel Institute, with worldwide capacity of more than 900 million tons a year.

Another problem the steel companies would have is convincing antitrust regulators that the new company is more efficient--a requirement of mergers--when they are asking the government to pick up expenses, Talley said.

“It could potentially be an antitrust problem,” he said.

Lourenco Goncalves, president and chief executive of Fontana-based California Steel Industries Inc., said his company is not involved in the merger talks and does not share the problems of the companies seeking consolidation.

He said he would support the proposed merger if it strengthened the U.S. steel industry. But he opposed their efforts to simultaneously win protective tariffs or quotas that would “create problems for healthy competitors.”

Supporters of imports, such as the Consuming Industries Trade Action Coalition, say the U.S. industry is capable of supplying only about three-quarters of steel needed by U.S. manufacturers

USX shares closed at $16.95 on the New York Stock Exchange, up 79 cents. Bethlehem rose 11 cents to close at 47 cents, and WHX Corp., parent of Wheeling-Pittsburgh, fell 2 cents to $1.49, also on the NYSE.

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Times staff writer James Gerstenzang in Washington contributed to this report.