Steel industry shakeout will leave only giants 02/03
The United States’ steel industry, battered by 21 bankruptcies in recent years, is being thinned out to a handful of huge companies that hope size can guarantee survival.
Companies like National Steel Corp. of Mishawaka, Ind., and Calumet Steel Co. of Chicago Heights, Ill., are operating in bankruptcy or closed, the victims of a pricing slump that began in the late 1990s and continued until last year. The survivors 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," Tom Danjczek told the Chicago Tribune. He predicted the survivors will be United States Steel, AK Steel Corp. and International Steel Group Inc., along with a handful of independent mini-mills. All three integrated steel companies buy taconite pellets that are carried by Great Lakes fleets, but most are trying to divest themselves of ownership in taconite plants or already have done so.
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.
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 has also gotten a push from the federal government. The federal Pension Benefit Guaranty Corp. has taken over the under funded 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 under funded pensions were a huge barrier to acquirers, in many cases making the sale of a steel mill impossible.
However, some observers doubt consolidation will save American steelmakers.
"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.
The consolidation of the steel industry in the U.S. 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.
Last 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.
The weak dollar has also helped make imports costlier.
"With the recent decline in the U.S. dollar, our prices are in line with the rest of the world," said Charles Bradford, head of Bradford Research.
Steel'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.
When the U.S. slipped into recession, weakened steelmakers quickly went under. And the failures continue.
Reported by: Al Miller