The Stel Salaried Pensioners Organization wishes to thank The Hamilton Spectator for permission to post the following article by Reporter Fred Vallance-Jones published in the December 28, 2004 edition
|
Dec. 28, 2004. 01:10 AM |
|
Big fish trolling for Stelco |
|
By Fred Vallance-Jones |
|
Only last winter, the notion that steel industry giants would be lining up to buy Stelco would have seemed ludicrous. The firm was losing hundreds of millions of dollars and had put itself under court supervised bankruptcy protection. Much has changed since those bleak days. World steel prices have soared and Stelco is making money. The ugly duckling is now the bride to be. The question now is not so much whether Stelco can attract suitors, but what happens after the wedding? Two of the proposals now on the table would refinance Stelco. They are the $900 million bid from Deutsche Bank that has been designated the one to beat by bankruptcy judge James Farley and a $1.8 billion joint proposal from the Ontario teachers pension fund and Sherritt International. But it is the potential bids from the steel companies that truly represent where the industry is heading and where Stelco is likely going, too. World steel is undergoing unprecedented change and consolidation and there's a good chance that either now, or in the relatively near term, Stelco will be scooped up as part of one or another global empire. Courtney Pratt, the CEO shepherding Stelco through the bankruptcy process, sees a future of fewer and fewer companies making more and more steel and commanding tremendous market power. "They are going to bigger; they are going to be stronger," he said. "They are going to be in a position to play a very powerful role with customers." Pratt said there will still be room for smaller, nimbler producers, such as Dofasco but even they are joining alliances. He points to Dofasco's joint ventures with Luxembourg's Arcelor. The four publicly known steel companies looking at Stelco are the newly formed Mittal Steel, U.S. Steel, Russia's Severstal and Algoma Steel of Sault Ste. Marie. By far, the biggest is Mittal. It is the product of the merger of International Steel Group, itself created through a series of mergers of bankrupt U.S. mills, and the steel interests of British steel tycoon Lakshmi Mittal. The deal is to be final by spring and will create the world's largest steel producer with annual production capacity of 70 million tonnes. Two other giants have long and rich histories. U.S. Steel is one of the icons of the American industrial heritage. It was founded in 1901 by some of the country's most famous tycoons, including J.P Morgan and Elbert H. Gary, after whom the steel town Gary, Indiana is named. It has undergone extensive restructuring and job cuts in the past 20 years and is one of the few of the original American steel firms left standing after the bankruptcies and mergers of the late 1990s and early years of this decade. In 2003, it scooped up bankrupt National Steel Corporation in a $750 million deal that propelled it into the ranks of the world's top producers. The company has also bought mills in Slovakia and Serbia and is on the hunt for more. John Armstrong, a spokesperson at U.S. Steel's Pittsburgh headquarters puts his firm's ambitions plainly. "We see ourselves as a consolidator." The company is on the lookout for mills that fit in with its broad corporate strategy. "We aim to serve the value-added steel market, which is primarily automotive, appliances, construction, with value added steel products," Armstrong said. "Those kinds of steels generate premiums when you sell them." OAO Severstal has at least as colourful a history as U.S. Steel and certainly as much ambition. Severstal has its roots in the bloody Soviet regime of Josef Stalin. Inspired by the industrial prowess of Henry Ford, Stalin decided in 1940 to build a major steel mill in Cherepovets, a town about 600 kilometres northeast of Moscow. Stalin's timing was bad, coming shortly before Hitler's armies stormed into the USSR. Construction was halted and steel production didn't begin until 1958. Nonetheless, the Cherepovets steel mill went on to prosper. After the Soviet Union imploded in 1991, the new Russian government of Boris Yeltsin began massive privatizations and, as with many companies, ownership vouchers in what was now called Severstal were distributed to workers and managers. Local managers in Cherepovets set up a company to buy steel from Severstal and resell it at a profit, giving them enough money to take control of the company. Chief among the buyers was Alexei Mordashov, who in the process became one of the world's richest men and ultimately Severstal's CEO. Severstal became a solid performer after trimming nearly 20,000 jobs by spinning off non-core businesses. The company has moved aggressively to spend some of its cash. Last year, it outmanoeuvered U.S. Steel to buy Rouge Industries in Dearborn Michigan, in a deal worth nearly $300 million. This month, Severstal made a $600 million offer for 60 per cent of the Italian steelmaker Lucchini. And it continues to look at a $1 billion plus bid for Stelco. Mordashov and Thomas Veraszto, deputy director general, have not made any secret of their ultimate ambitions. "In the ideal situation, we would like that there are four to six big players with 70 to 100 million tonnes (production) each," Veraszto told The Spectator, "which will dominate the world market and which will be able to adjust their volumes of production peaks and troughs to stabilize prices." Veraszto said his company wants to acquire mills both in emerging markets such as Eastern Europe and Brazil, where costs are low, and in developed markets such as Canada and the U.S. where there is access to sophisticated customers such as the auto industry. If and when Stelco ends up as part of one of the steel giants, it will change from being a locally controlled company that competes with everyone else to a cog in a much larger wheel. Its five million tonnes of production is dwarfed by the emerging giants. U.S. Steel has already integrated all of the old National Steel operations with its own and sells the steel through a common sales organization. Its two mills in Eastern Europe are similarly under one umbrella. "The whole objective is to take advantage of the synergies," Armstrong said. The same goes for Severstal. Purchasing Stelco would double the company's North American production, creating new opportunities for efficiencies. "There are some very interesting, substantial synergies (with) our American assets in Dearborn," said Veraszto. "Both are very much in the same market, very strong in automotive, and both are located in the Great Lakes area. There are some synergies on the market side in the sense that each produces a product that the other doesn't have." All of which has profound implications for Hamilton and Stelco. While the company is huge on the Canadian landscape, it is a relatively tiny player when compared to global steel companies or a bank with global ambitions. That raises questions about the loss of local management and control and what that could mean for the community. Severstal has already reassured Hamilton officials that big layoffs are not part of the plan for Stelco, but Hamilton Mayor Larry Di Ianni knows that dealing with a global giant will be different than dealing with a firm whose CEO is down the road. "There is a concern about the overconcentration of ownership in ever smaller hands," the mayor said. "When fewer people own the majority of assets in any given field, it removes them from the many communities that they operate in." Di Ianni hopes that even with ownership in another country, the company will continue to be managed locally and will consider the interests of Hamilton in its business decisions. Of course, one of the companies looking at Stelco is Algoma Steel, itself a survivor of two rounds of court-supervised restructuring. There are a lot of questions around Algoma's possible bid, including whether the company has the financial resources to prevail in a bidding dust-up with global giants The question also arises whether Algoma's interest may be defensive, the hope of growing rather than being gobbled up itself. Peter Warrian, a steel industry specialist at the University of Toronto's Munk Centre, said a company such as Severstal could have great interest in Algoma, especially if it picked up Stelco as well. "If someone had Algoma, Rouge and Stelco, boy are they in a powerful position. Water is the cheapest transportation and they are all on the Great Lakes. I don't know if somebody will do it, but somebody is definitely thinking about it." The biggest question mark in all of this is the future of Stelco under the Deutsche Bank bid. "It is difficult to see that that kind of an organization wants to manage a steel company for any great length of time," Warrian said. There have been suggestions the bank might be acting for another party, even U.S. Steel, but they have not been confirmed. Pratt said he doubts the bank will quickly flip Stelco, but the longer run picture is less clear. For now, interested companies have until the end of this week to look at Stelco's confidential information package before submitting a non-binding expression of interest. During January, Stelco will give those who expressed interest in the first round access to much more detailed information, as well as briefings by company management and plant tours, before final bids are submitted at the end of January. Stelco management, along with the board, the court appointed monitor and other advisers, will review the bids before submitting one to Farley for approval. Pratt expects the review process to be difficult."If you thought you were going to get three bids that were exactly the same except for the total value, you'd say that would be pretty easy. But we're not going to get apples and apples and apples. We're going to get apples and oranges and bananas." Pratt said at least the immediate fate of Stelco should be known by April. Whatever the future for the company, Di Ianni can't help but be pleased with the change of fortune since those dark days of January. "You've got these suitors wanting to invest in the city through the company, which is a nice place for the city to be in." fvallance-jones@thespec.com 905-526-2499 |