American steel is hot

Sparrows Point and Weirton, W.Va., mills might attract bids by foreign steelmakers eager to get a foothold in the U.S. market

December 10, 2006|By Allison Connolly | Allison Connolly,Sun Reporter

Five years ago, there would have been few takers for the steel plants in Sparrows Point and Weirton, W.Va.

Bethlehem Steel Corp., which owned Sparrows Point at the time and was once the largest steelmaker in the world, was in its death throes, joining the list of Rust Belt companies that buckled under the weight of high costs and fierce competition.

But if either plant goes up for sale early next year, there could be multiple bids for each. And there's a good chance the buyer won't be American.

After years of bankruptcy and rampant consolidation, American steel is suddenly hot. Foreign companies have the cash, and are looking to get a foothold in the American market, where they can charge a premium for their product.

It started with Mittal Steel Co. NV chief executive Lakshmi N. Mittal's quest to build the largest steelmaker in the world. Two years ago, he bought International Steel Group, which itself had been built on the carcasses of defunct companies, including Bethlehem's Sparrows Point complex and Weirton. This year, Netherlands-based Mittal successfully waged a hostile takeover of the world's second-largest steel company, Luxembourg-based Arcelor SA.

The combined company, Arcelor Mittal, will control 10 percent of the world's steel production, with more than 110 million tons this year. The $33.5 billion deal, which is expected to be completed in the spring, is the largest to date.

Following Mittal's lead, steel companies from Europe, Russia, South America and Asia in recent weeks have been circling U.S. companies.

"Arcelor Mittal is not an aberration, it's just the beginning," said steel analyst John Anton, with Washington-based Global Insight.

In the past, foreigners stayed away from American companies because they had higher costs and unionized work forces.

But now, after an industry shakeout, American steel companies are more efficient than ever. For example, Sparrows Point's nearly 2,500 workers produce 3 million tons of steel a year. That's more output per worker than in 1969, when 26,500 workers produced 5 million tons a year.

And, many no longer carry "legacy costs," having shed their health care and pension obligations for retirees during bankruptcy, as was the case with Bethlehem Steel.

Companies in Russia, India and Brazil have access to iron ore at home, where labor is cheaper. They want entry to the American market, where they can charge customers in the auto, construction and appliance industries a premium for finished products.

"The United States is one of the most attractive markets in the world," said steel analyst Christopher Plummer. "[Foreigners] are looking to these companies to lock in this market."

Look elsewhere

They can't go as easily to China, the world's biggest consumer of steel and largest exporter, because the country prevents foreigners from taking a controlling stake in its companies.

"They've all got ambitious growth plans in their region and have gone as far as they can," Plummer said. "They need to look elsewhere."

Late last month, Luxembourg-based Evraz Group SA, the largest domestic steelmaker in Russia, signed a deal to buy Oregon Steel Mills in Portland for $2.3 billion.

Russian-owned OAO Severstal made a play for Arcelor but ultimately was beaten out by Mittal. It owns Rouge Steel in the Detroit area and is building a plant in Mississippi.

A Moscow newspaper has reported that Severstal is interested in Weirton and in Pittsburgh-based U.S. Steel Corp.

Cash offer

CSN Brazil wanted Wheeling-Pittsburgh Steel Corp., but appears to have been outgunned by Chicago-based Esmark Inc., which won a proxy battle to install a board of directors that favors a merger with the American company. Esmark has said it would make a cash offer for Weirton, if the Justice Department allows Mittal to sell it.

German steelmaker Thyssen Krupp AG is still pining for Dofasco, Mittal's Canadian subsidiary. Mittal promised to sell it to ThyssenKrupp to settle U.S. Justice Department antitrust concerns about tin production in North America, if its merger with Arcelor succeeded. But a Dutch trust that controls Dofasco has blocked a deal. If that holds, the Justice Department will force Mittal to sell Sparrows Point or Weirton, and it will decide which one will be sold and to whom.

One way or the other, the German steelmaker is determined to get into the market here. It has said it will spend $2.9 billion to build two plants in the South if it is unable to buy Dofasco, though steel analyst Charles Bradford of New York City-based Bradford Research Inc. believes Thyssen Krupp may consider buying an existing steel mill because to do so is cheaper.

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