Sparrows Point's $1.2 billion question

Our view: Sale of Sparrows Point should put hundreds back on the job, but doubts remain over the historic facility's long-term prospects

March 03, 2011

Three years ago, the purchase of the Sparrows Point steel mill by OAO Severstal was greeted with considerable cheer. After all, the one thing the Russian steelmaker could provide would surely be stable ownership after all the uncertainty of the ArcelorMittal takeover and the Bethlehem Steel bankruptcy.

Of course, what wasn't so obvious in March 2008 was how far the U.S. and global economies would fall in the economic recession, and the hardship that would cause the steel industry. Severstal's relatively brief period of ownership will not be remembered as a shining moment in Sparrows Point history, particularly for the hundreds of workers laid off during the past year.

But this week's announcement that the facility will be sold to the private equity firm Renco Group Inc. brings renewed hope — if only because the new owners are expected to ramp up production and put many of those laid-off workers back on the job in the coming months. That alone is a big win for the economies of Baltimore County and the state of Maryland.

That Renco is buying Sparrows Point and two other properties for the bargain price of $1.2 billion, far less than the $2.2 billion Severstal paid for them, is also good news. With less debt to service, it should make it easier to turn a profit at Sparrows Point and make more capital available for modernization and investment there. At least, that's the theory.

Some view the company's plan for its subsidiary, RG Steel, to be headquartered at Sparrows Point as an encouraging sign as well. Baltimore County Executive Kevin Kamenetz said Thursday he is already reaching out to the owners to welcome them to the community and encourage further growth and investment at Sparrows Point. Gov. Martin O'Malley issued a statement with a similar offer of "help … to return, retrain and retain nearly 2,000 steelworkers in Sparrows Point."

Still, Renco faces some formidable obstacles, not the least of which is the legacy of toxic waste and contamination at Sparrows Point after more than a century of heavy industrial use. That's a challenge that seems to have dogged other Renco properties, a possible red flag to those who are pushing for further cleanup of the Point.

Nor is it clear that the new owners are prepared to invest the hundreds of millions of dollars required to modernize and upgrade the facility so that it can compete in the long term. Demand for steel remains low, while raw material costs are relatively high. That's bound to change as the economy recovers, but it's a prime reason why Severstal wanted out now.

So in welcoming the fourth Sparrows Point owner since the Bethlehem bankruptcy, perhaps a measure of cautious optimism is the best response. Government leaders and the mill's unions say they're ready to help make the plant profitable, and that's all very good. But will RG Steel regard Sparrows Point as more than a distressed property to be flipped in a few years and make the needed investments that its predecessors failed to do? That is the $1.2 billion question that has yet to be answered.

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