The Stel Salaried Pensioners Organization wishes to thank The Hamilton Spectator for permission to post the following article by Business Reporter Steve Erwin (The Canadian Press) published in the December 22, 2003 edition

Dec. 29, 2003. 12:42 AM

Prices, demand up but it's a long road

Consolidated U.S. mills, high dollar, may slow steel recovery

By Steve Erwin
The Canadian Press

In another year, rising steel prices and an improving U.S. economy would give Canadian steelmakers reason to cheer when ringing in the new year.

But despite improving markets, a host of other variables -- including a soaring Canadian dollar, high energy costs and increased competition with newly restructured American mills -- have many producers north of the border in cost-cutting mode.

And that has hundreds of workers bracing for a potential industry restructuring in Canada that could cost jobs but prevent a meltdown of some of the country's biggest steel companies -- including Hamilton's Stelco Inc., which enters 2004 with a new CEO and soon, a revised business plan.

"Maybe there's confidence they can turn the corner and get through this crisis. I'm crossing my fingers," said Wayne Fraser, Ontario director for the United Steelworkers union, which represents Stelco workers.

Fraser plans to meet with incoming Stelco chief executive Courtney Pratt shortly after he takes the reins of the company Jan. 1 to see where the company's cost-cutting plans are headed. Analysts, too, are awaiting more details out of Stelco's internal review of its operations expected to result in moves that will significantly alter the look of Canada's steel industry.

About 150 jobs were being cut by year's end at Stelco, which lost $168 million in the first nine months of 2003. Some analysts say the steelmaker's 9,500-member workforce needs to be cut by as many as 1,500 positions, and it's still unclear whether the company will need to enter a formal bankruptcy restructuring in court.

Court protection from creditors has already been sought by Slater Steel of Mississauga and Hamilton. Slater has said it will close if it doesn't get major concessions from workers. Slater will close Atlas Specialty Steels operation in Welland and is threatening to liquidate assets at Atlas Stainless Steels in Sorel-Tracy, Que., and a Hamilton specialty bar operation.

Ivaco Inc. of Montreal also sought bankruptcy protection in Canada and is selling four steel plants in the United States, citing deteriorated market conditions.

Algoma Steel of Sault Ste. Marie, which restructured under bankruptcy protection in early 2002, has been forced to cut hundreds of jobs in recent months.

Even Hamilton's Dofasco Inc. saw its normally healthy profits cut in half over the year.

Stock prices in some of those companies surged in recent weeks, somewhat unexpectedly, with some investors finding optimism in improved steel demand and in turn, higher steel prices.

But analysts say the industry cannot rely on a demand-side rebound alone -- rationalization is needed to compete with American mills.

The U.S. steel industry has undergone a massive consolidation, started more than two years ago and resulting in revived companies with much lower so-called "legacy costs" for pensions and benefits to thousands of retirees.

That means U.S. mills will continue to improve their bottom lines in an improving steel market much faster than unionized firms with large pension obligations such as Stelco or Algoma, said Jarrett Blouin, who follows the steel sector for Dominion Bond Rating Service Ltd.

"To continually operate with a significantly higher cost base, obviously they're going to be helped by improving market conditions, but they're still facing a cost disadvantage and that has to be addressed somehow," Blouin said.

With more cost-efficient U.S. firms competing against Canadian firms who haven't endured a wider cost rationalization, "the playing field has unequivocally changed," says Randy Cousins, who follows Canada's steel sector for BMO Nesbitt Burns.

"Companies that had a reasonable cost structure on a relative basis may, with the combination of a higher dollar and some of the changes in the United States, be at a competitive disadvantage, which necessitates them getting their costs down."

On the bright side, an improving U.S. economy is increasing demand for steel and steel prices on the spot market have risen in step. Near the bottom of the market cycle, hot-rolled steel sheet prices were selling at $260 US per ton in June, but were averaging around the $315 US per ton mark in the fourth quarter of 2003.

Cousins said it's possible prices of the benchmark steel product could range between $330 and $350 US per ton in the 2004 first quarter, pending continued strong demand for steel in the rapidly expanding Chinese market. Also, increased demand in North America and Europe should provide price stability, he said.

On the other side, input costs, such as scrap metal and other raw materials, are rising, offsetting some of the steel product pricing improvement, says Blouin.

Strong demand in Asia has resulted in a pulling of supply out of North America and it's driving up costs for iron ore, metallurgical coal and scrap.

"They're hitting very high levels," Blouin says of rising materials costs. "You need a crystal ball to project what's going to happen in '04, but indications look like they're likely going to remain high."

Another huge wild card for Canadian producers is the Canadian dollar, which increased by as much as 20 per cent in value in 2003 against the U.S. greenback.

Cousins says Canadian steelmakers likely haven't faced the full effect of the soaring loonie, citing a "lag effect" after companies hedged at a lower dollar earlier in 2003.

With so many variables, forecasting is difficult for producers, even at Dofasco, Stelco's Hamilton rival and one of the few major Canadian steel firms to stay profitable in 2003.

"It's a tough projection," says Dofasco spokesman Gord Forstner.

"We're anticipating in the foreseeable future more tough times like the ones we've been experiencing.

"But our focus I guess has been to drive down costs."