The Stel Salaried
Pensioners Organization wishes to thank The Hamilton Spectator for permission
to post the following article by Reporter Naomi Powell published in the
December 27, 2005 edition
By Tara
Perkins
The Canadian Press
TORONTO (Dec 27, 2005)
Canada's steel industry is poised for
more rapid change in the year ahead after clinging to the edge of its seat on a
white-knuckled ride through much of 2005.
"The Canadian steel industry is
going through one of the most dramatic changes of the last 50 years,"
according to New York-based steel consultant Michael Locker.
As 2005 drew to a close, Dofasco Inc.
was the subject of a takeover battle, Stelco Inc. was finally nearing the end
of its two-year restructuring and Algoma Steel was fending off an attempt by
its biggest shareholder to force it into making a massive cash payout.
The industry was tossed on a sea of
uncertainty in 2005 after steel prices hit all-time highs at the end of 2004,
creating "a new steel era," Locker said.
"China's demand is driving the
ship. Consolidation is the name of the game. Prices have a new plateau. Raw
materials are much more expensive."
A few years ago, dozens of North
American steelmakers were tumbling into bankruptcy proceedings. Then came
China, whose rapid development has given the industry whiplash.
While steel prices have fallen since
their unprecedented highs of late 2004, observers believe 2005 proved that the
bottom of the price cycle has risen.
"The days of $250 US a ton steel
are gone," said steel analyst Randy Cousins, of BMO Nesbitt Burns, adding
it's impossible to predict steel prices for 2006. His best estimate was
somewhere between $400 and $600 US per ton.
Cousins said he's never in 20 years
seen so many pricing factors in such constant flux. Basically every steel input
has become more expensive, he noted.
Stelco CEO Courtney Pratt said what was
already a volatile industry became even more so in 2005.
"The extent and the speed of
changing in pricing has been enormous and the level of unpredictability has
been enormous."
Denis Turcotte, chief executive of
Canada's No. 3 steelmaker, Sault Ste. Marie-based Algoma, said he believes
markets will be strong going forward, but "will ebb and flow.
"In September of 2004, pricing was
north of $800 a ton," said the CEO. "By August 2005, it was about
$410. That's a $400 a ton drop."
But it was a far cry from historical
lows. And August proved to be the bottom of the cycle, with prices rising by
$100 a ton in September and remaining strong.
Turcotte hesitated to declare a
"new normal" for the industry -- "I would never use the word
permanent to describe anything" -- but he's confident the extended bull
run has been based on real changes.
"If you look at the last 20 years,
you constantly had demand chasing supply. You always had more supply at any
point in time than you needed," he said.
"We're now in a period where it's
the opposite. Supply is chasing demand because you've got a higher level of consumption
globally. The net result should be higher average trend line pricing going
forward."
The new pricing allowed Stelco to earn
$47 million in the first nine months of 2005 as it waded through the bankruptcy
protection process it began in January 2004.
It also delayed restructuring
negotiations.
"That huge runup in steel prices
changed the nature of this restructuring from a group of people looking at
concessions, to people looking at 'how do I maximize my gains from this
restructuring?,'" said Pratt. "That makes it very, very difficult to
get a deal done."
Stelco abandoned the hunt for
concessions from its workforce and found new financing it hopes will allow it
to emerge from protection in the next couple months.
As bottom lines across the industry flourished,
many other steel CEOs faced new problems.
Take Algoma: New York-based Paulson
& Co., which has a 19 per cent stake in the company, is trying to force a
payout of hundreds of millions of dollars to shareholders and wants its board
replaced.
Paulson criticized Algoma for sniffing
around Stelco at the beginning of 2005. The hedge fund said Algoma wasted
substantial time and money pursuing Stelco when prices were hot.
Turcotte denied that and hints that a
wedding between Stelco and Algoma could still be a possibility.
"I strongly disagree with Paulson
that it was the wrong thing to do," Turcotte said. "It was absolutely
the right thing to do."
"We gained an understanding of
what we needed to understand to position ourselves if and when it becomes of interest
to us in the future. We accomplished that."
In March, Stelco tossed out its sale
process after a handful of offers and began searching for new financing.
Meanwhile, Algoma put itself on the
auction block, taking itself off this summer, when Turcotte said some suitors
were interested but none were willing to pay enough.
"When we ran our (sale) process,
within about three or four weeks, the price of steel started to drop quite
aggressively," Turcotte said. "The notion of putting out $1 billion
or more to do an acquisition in a falling market is something that not a lot of
people are prepared to do."
Now that August appears to have hit the
pricing trough, "the consolidators" have regained confidence,
Turcotte said.
Algoma has agreed to hold a shareholder
meeting in March to hear Paulson's proposal.
The proxy battle would not have arisen
in the absence of a healthy steel market, Turcotte said. At the end of
September, Algoma had about $450 million cash on hand, even after coughing up
$238 million in special dividends in August.
"As we've shown through our
behaviour, we believe that for the time being, we should continue to focus on
small investments that continue to shore-up and improve the business, as
opposed to blowing our brains out on some massive billion-dollar
expenditure." Turcotte said.
This year's steel blockbuster news was
the wooing of Dofasco Inc., Stelco's more profitable next-door neighbour,
considered a jewel in the North American industry.
In May, the world's second-biggest
steelmaker, Arcelor SA, teamed up with American giant Nucor to approach
Dofasco.
The company played hard to get and on
Nov. 23 Arcelor publicly announced a hostile $56-per-share bid. It's not known
what happened to Nucor's interest.
Within days, Dofasco's board endorsed a
$61.50-per-share white knight offer from German steel conglomerate
ThyssenKrupp. Dofasco shareholders have until Jan. 10 to tender to that offer.
On Friday, Arcelor came back with a
sweeter offer of $63 a share. Dofasco is reviewing the bid.
The interest in Dofasco created a
sudden interest in the equity Stelco will issue once it emerges from court
protection.
In early December, Stelco won
much-needed creditor support when it changed its restructuring plan to give
unsecured creditors a chance to get more of the yet-to-be-issued shares.
But some people involved with Stelco
said it's only a matter of time before it's gobbled up by another steelmaker as
the industry continues to consolidate.
"I predict Stelco will be bought
by an international player," Locker said.
Pratt himself acknowledges the
possibility.
"I would be surprised if we didn't
get approached," he said. "I think the issue is when."