The Stel Salaried Pensioners Organization wishes to thank The Hamilton Spectator for permission to post the following article by Reporter Steve Buist, published in the November 14, 2005 edition

Stelco awaits critical vote

By Steve Buist
The Hamilton Spectator
(Nov 14, 2005)

At some point, Stelco will emerge from bankruptcy protection. That much we know.

What can't be predicted is what the future might hold for the struggling Hamilton steelmaker.

Will it be a future that mimics the successes of restructured companies such as Algoma Steel and Air Canada?

Or will it look more like Slater Steel, which has been sold off piece by piece since 2003, or worse Eaton's, which faded into oblivion after more than a century as a Canadian retail giant?

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The steelmaker faces a crucial vote tomorrow as its bondholders decide whether to veto refinancing deals which have been months in the making.

The bondholders, who are Stelco's principal creditors, have said they plan to vote down the restructuring deal, sending all sides back to the drawing board.

But the recent cases of Algoma and Air Canada offer reason for cautious optimism. Since emerging from a second restructuring in January 2002, Algoma has returned to profitability -- granted, at a time when steel prices have been red hot.

Over the past seven financial quarters, the Sault Ste. Marie steelmaker has piled up more than $500 million in profits.

In fact, Algoma is flush with so much cash that the company announced in August it would pay a special $6-per-share dividend and its major shareholder is trying to force the company to pay out a further $400 million to shareholders.

But that was also Algoma's second kick at fixing its problems.

During Algoma's first restructuring a decade earlier, employees voted overwhelmingly in favour of wage cuts in exchange for 60 per cent of the company's shares. It became the largest company in North America at the time to have the majority of its ownership held by employees.

The provincial NDP government of Bob Rae also pumped in $110 million of aid and the federal government allowed healthy companies to absorb some of Algoma's debt as a tax writeoff.

That tool, called an income debenture, is no longer available as a remedy.

"At that time, there was enormous pressure on the government," said Richard McLaren, a University of Western Ontario professor who specializes in corporate insolvency issues.

"They believed that as went the Algoma restructuring, so went the city of Sault Ste. Marie."

Algoma is one of at least half a dozen North America steelmakers that have been forced to go through the restructuring process more than once. About 50 North American steel companies, including 13 in Canada, have gone into bankruptcy protection in the past seven years alone.

"We've seen all the big basic steelmakers one after the other in the U.S. and now Canada restructure," said McLaren. "The only really successful one that's escaped it is Dofasco."

The constant parade of steelmakers into bankruptcy protection hasn't appeared to solve fundamental problems, but has changed the face of the industry.

Between 1997 and 2002, steel mills in the United States slashed jobs by 24 per cent, but production fell by only 6.3 per cent.

Now it's the airline industry that seems to be suffering the same fate. Four of the six largest U.S. carriers are operating under bankruptcy protection and Air Canada spent 18 months in shelter from April 2003 until Sept. 30, 2004.

When Air Canada re-emerged, it had shed about $9 billion in long-term debt, as well as 17 per cent of its workforce.

But the bold moves appear to have borne fruit. In its most recent quarter, just a year out of bankruptcy protection, Air Canada reported a profit of $270 million.

Yet even a successful restructuring like Air Canada or Algoma may not be enough to protect Stelco the next time the steel industry faces serious pressure, according to one expert.

What's worse, Peter Warrian said, the same is likely true for Algoma and even Dofasco, which may be North America's steadiest steelmaker.

"Every one of these three independent steel producers will not survive the next major downturn as an independent entity. They'll be either brought into a takeover or a merger or a partnership."

Warrian, a University of Toronto professor who specializes in steel industry issues, guesses the next major downturn could be as soon as 2007 or 2008, "when China starts to export huge amounts of steel instead of import huge amounts of steel."

He also speculated Dofasco would end up allied with Luxembourg-based European giant Arcelor, Stelco with either Mittal or Severstal, with Algoma left looking for a buyer.

sbuist@thespec.com

905-526-3226