Big Steel Seeks New Mettle
Updated from 11:09 p.m. EST
U.S. steel makers are hoping corporate alchemy can transmute their broken industry into a unified international competitor. Wall Street, so far, is liking the trick.
Steel stocks continued to strengthen a day after USX-U.S. Steel (X), the top U.S. steel producer, and Bethlehem Steel (BS) said they were in talks to consolidate most of the country's production in an effort to stave off foreign competition. At least three other firms were discussing their plan to consolidate.
The merger talks aim to address the competition posed by cheap foreign imports, which domestic producers say are supported by foreign government subsidies. The plan also calls for help from Washington to bear the weight of pension and retiree healthcare costs, a move that the companies said would remove the "most significant barrier to consolidation of a highly fragmented industry."
Gold Teeth"The real issue here is legacy cost and union issues. I think they all could stand on their own two feet if those issues, and imports, were addressed," said Daniel Roling, analyst at Merrill Lynch. "But clearly consolidation is needed just from an economic standpoint. We need fewer bigger steel companies just like we have fewer and bigger tobacco companies, beverage companies, and telephone companies." Shares of USX-U.S. Steel lately tacked onto Tuesday's gains, rising 7.4% to $18.21, while Bethlehem, which is under bankruptcy-court protection, recently rose 53% to 72 cents. The companies have invited their domestic competitors to participate in the preliminary talks. According to Reuters, the others include LTV, which declared bankruptcy last year and is now facing liquidation, National Steel (NS), and WHX's (WHX) Wheeling-Pittsburg Corp. National Steel recently climbed 35% to $1.69, and WHX, giving up some earlier gains, inched up 0.6% to $1.50.
AjaThe U.S. steel industry employs about 13,000 people and supports 75,000 retired workers. Many producers sought bankruptcy protection following the 1998 Asian financial crisis that caused a rush of low-priced steel imports from countries like Japan into the U.S. market. "U.S. Steel believes that consolidation of the industry under the right circumstances will be a positive step toward restoring the health of this vital part of the American economy," said USX Chairman Thomas Usher Tuesday in a prepared statement. Experts agree that the move toward fewer and bigger steel companies would be positive for the flailing industry, which has to date seen 25 bankruptcies. The consolidation could not only bail out more than one struggling player, but also steer the industry -- now viewed as a relic of nineteenth-century industrialism -- toward profitability. Nevertheless, analysts warn that tough political obstacles lie in the way. "It's a significant positive for the industry that actual talks are going on. These are much needed talks," said Chris Olin, analyst at Midwest Research. "[But] my concern is that it's probably a little early to get really excited about this news," he added. "It'll be very difficult to achieve all three [conditions] and if anything, it'll be a very long process." In their statement, the companies said any consolidation would require the implementation of a presidential proposal aimed at reducing foreign subsidies, and government help with pension and retiree healthcare costs. The group would also need a new labor agreement to cut operating costs. "The above scenario lies in the realm of political uncertainty," wrote Roling in a report, adding that the chances of success are "even at best." "I think the that today the steel industry is a victim of bad timing," said Olin, adding it's unlikely that the Bush administration would be willing to close U.S. borders to foreign exporters, given the current global climate and the U.S. war effort. "The multibillion dollar bailout for healthcare is probably a stretch, too, as other industries also have these difficulties," he said.
Dr. WooAnd a labor agreement from the unions would be difficult to achieve as the union's goal is keeping people employed, Olin said. "Union concessions are topic of debate these days and are a very touchy subject," Olin added. According to published reports, the United Steelworkers of America, which represents about 140,000 steelworkers, has said it is fully behind the consolidation plan as a way to prevent the industry from collapsing. Nothing has been announced about the structure of the new company, though U.S. Steel is expected to have a leading role in it. The merger would probably result in plant closings and a loss of jobs. Observers also expect antitrust officials in Europe, to voice opposition to any consolidation of the U.S. steelmakers. Are there players that have the mettle to stand firm against a newly minted behemoth? Nucor (NUE) is possibly the only candidate, said Roling. The second-largest steelmaker in the country, based in Charlotte, N.C., has a management philosophy and style that differs from its older counterparts, said Roling. Also, as a non-unionized minimill formed in the seventies, Nucor doesn't have the legacy costs and union problems that its rivals bear, Roling said. Stocks of Nucor recently soared 8.4% to $54.02, close to its 52-week high of $56.50.
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