Prospects gloomy for Rouge Steel workers

["Charles Brown" <cbrown@xxxxxxxxxxxxxxxxx>]

Thursday, October 30, 2003
Prospects gloomy for Rouge Steel workers
By Doron Levin / Autos Insider


Henry Ford never dreamed that Rouge Steel, which he built early in the last
century to supply Ford assembly lines, might one day be bought in bankruptcy
court by a Russian steelmaker. 
That's just what could happen, however, if OAO Severstal, Russia's No. 2
steelmaker, prevails with a nonbinding letter of intent, submitted last
week, to buy the assets of Dearborn-based Rouge Industries Inc. Details of
the offer weren't disclosed. 
First, Severstal may have to outbid U.S. Steel Corp. -- which earlier
discussed with Rouge the possibility of acquisition -- or other steelmakers,
such as International Steel Group Inc., owned by Wilbur Ross, that have been
gobbling failing steel mills in the Midwest. 
With 20 percent excess capacity in the world steel industry, it's an uphill
fight for Rouge to stay viable as a subsidiary of Severstal or any other
steelmaker. Without cooperation from the union, its prospects are nil. 
Rouge Industries filed for Chapter 11 bankruptcy protection a week ago,
listing among its creditors, Ford Motor Co., U.S. Steel and the city of
Dearborn. 
For Severstal, which specializes in sheet steel for the Russian automotive
industry, buying Rouge would mark its first penetration of the U.S.
automotive market and be a hopeful sign for burgeoning Russian capitalism. 
Severstal's entry in the United States has been made more difficult over the
past 18 months by protective tariffs against foreign steel put into place by
the Bush administration. 
The administration is expected to decide shortly whether to withdraw the
tariffs or continue them for another 18 months. The United States almost
certainly faces retaliation from the European Union unless they are dropped.

"The purchase (of Rouge) would let us come to the U.S. market for a long
time," Severstal's spokeswoman Olga Yezhova said in a telephone interview
from Cherepovets, Russia, where the company is based. "Exports of Russian
cold-rolled steel for cars to the U.S. face limits now. 
William E. Hornberger, a Rouge spokesman, said, "We first met Severstal
people more than a year ago. We found them to be very knowledgeable, very
bright steel people." 
Rouge shares today are selling for only a few cents a share, consistent with
the company's announcement that any recovery for equity holders is unlikely
in the bankruptcy. In mid 1994, Rouge shares sold for nearly $35 and have
dwindled ever since. 
Severstal shares, by contrast, lately have risen to the neighborhood of
3,500 rubles ($117.32) per share, from about 600 rubles three years ago. The
steelmaker is also bidding for 79 percent of the Hungarian steelmaker,
Dunaferr Rt. 
Whether Severstal or another steelmaker buys Rouge Steel's assets,
employment prospects are gloomy for many of the 2,000 or so hourly workers
represented by the United Auto Workers union. 
Typically, the reorganization of steel mills under new owners has led to
extensive firings, as well as curtailment of pension, health care and other
benefits. 
"Labor contracts in the steel industry were totally out of line with the
reality of a changing world," said David Littmann, chief economist for
Comerica Bank. 
"It could have been the Koreans or anyone" to buy Rouge, he said. "The wave
of the future is to declare bankruptcy to relieve yourself of astronomically
uncompetitive costs." 
Ford, which has been closing auto plants and laying off workers in part
because of uncompetitive union contracts, tried to keep Rouge in business.
The automaker, however, has its own problems, with huge financial losses and
Toyota Motor Co.p. nibbling at its market share. 
In 1989, Ford spun off the Rouge steel operations as a public company. Amid
the collapse of steel prices, the steelmaker had posted losses from 1999
through 2002 totaling $329 million. In 2002, Ford lent Rouge $75 million. 
Ford is Rouge's key customer. It buys 700,000 to 800,000 tons of steel
annually, making Rouge one of the automaker's biggest steel suppliers. 
Last month, the UAW asked Ford, General Motors Corp. and DaimlerChrysler AG
to buy steel at prices high enough to help Rouge avoid bankruptcy or a
takeover by U.S. Steel. Apparently a bailout wasn't in the cards. 
The Bush tariffs were devised to help U.S.-based steelmakers compete against
imports and win the political support of workers in Pennsylvania, Ohio, West
Virginia and other steel-making states. 
Oddly, the tariffs not only weren't sufficient to keep Rouge out of
bankruptcy, they've boomeranged in unanticipated fashion against Ford. 
Ford's suppliers now are complaining that they can't take advantage of low
steel prices -- such as those Severstal might be charging if it could import
its products to the United States. Ford, meantime, is hammering those same
suppliers for lower parts prices so it can compete against foreign
automakers. 
The time has long since passed when Ford can afford to be sentimental about
where it buys its steel. If Henry Ford were around, he might have made that
point himself. 
Doron Levin is a columnist for Bloomberg News. He can be reached at (248)
827-2942 or dlevin5@xxxxxxxxxxxxxx



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