back to the future

["Ian Murray" <seamus2001@xxxxxxxxx>]

[NYTimes]
January 20, 2002
Parched, Big Steel Goes to Its Washington Well
By LESLIE WAYNE

As one industry after another troops to Washington to ask for handouts, Thomas J. Usher, the chief
executive of the U.S. Steel Corporation, has an offer he feels the Bush administration cannot
refuse.

He wants $12 billion in government aid to pay for employee retirement benefits that are now the
obligation of the steel industry. After that, he wants antitrust clearance to allow U.S. Steel to
acquire a raft of steel makers, for practically no cash, giving his company a near monopoly among
old-line steel makers.

There's more. He wants the government to impose tariffs on imported steel of up to 40 percent, to
protect U.S. Steel and others - tariffs that could raise the price of every refrigerator and
automobile sold in America and that could threaten thousands of jobs in steel-using companies.

Finally, he wants it done soon - in the next few months, he says - to prevent the domestic steel
industry from collapsing.

"Although my proposal is ugly," said Mr. Usher, who has been rallying the industry and its unions
behind his plan, "it's not as ugly as liquidating some of these steel companies and putting 20,000
or 60,000 steelworkers and their families on the street without health care or pension plans."

With some, but not all, of the domestic steel industry reeling, Mr. Usher and platoons of steel
executives and union officials have been meeting with the White House to press their case. Aspects
of his proposal are so audacious that even some within his industry - mainly the Nucor Corporation
(news/quote), a mini-mill steel maker - have taken out newspaper advertisements denouncing some
elements as "corporate welfare." Still, Mr. Usher has been given an open door at the highest levels
of the Bush administration, which has been surprisingly sympathetic to the pleas of Big Steel.

"Inside the administration, this issue has gotten more high-level attention from the cabinet than
any other on the economic front," said Grant D. Aldonas, under secretary of commerce for
international trade. "There's lots of intense review of the numbers the industry has put forward,
and we are trying to get a bottom-line number on what the cost to the taxpayer would be."

The "can't refuse" aspect of the plan is the political cost that goes with not backing it. While the
Bush administration has not said whether it will support the plan, Mr. Usher and his fellow
executives, as well as leaders of the politically powerful steelworkers union, paint a bleak picture
of what refusal would mean. Particularly vivid is the specter of another round of industry
bankruptcies and the shuttering of steel mills. That would throw thousands of angry steelworkers
into the streets in crucial battleground states just as the Republicans are seeking more
Congressional seats in midterm elections.

"The cost to the administration of doing nothing has bad politics associated with it," said Terry
Straub, a U.S. Steel lobbyist. "You would have lots of bankruptcies in steel states, and the
politics of that speaks for itself. The Republicans see opportunity in states that traditionally do
not have strong Republican support."

William Klinefelter, a lobbyist for the United Steelworkers of America, concurred: "If things work
out, the president can go back to those states and say, `This is what I did.' "

Big Steel believes that it has a friend in President Bush. The companies were heartened by Mr.
Bush's decision to spend his Labor Day at a steelworkers picnic near Pittsburgh and to see Vice
President Dick Cheney campaigning in 2000 at Weirton Steel (news/quote) in West Virginia.

Even more important has been the administration's effort to enact some of the broadest restrictions
on foreign-made steel in over a decade. Within the next month, Mr. Bush is widely expected to impose
large duties or quotas on imported steel, something that the Clinton administration had steadily
resisted.

"Frankly, these guys have been a lot easier to deal with than the Clinton White House," one steel
industry lobbyist said. "For four years, we got a lot of lip service, but not action."

To prevail in Washington, U.S. Steel is leaving nothing to chance. The company has doubled its
lobbying budget, spending $2.7 million in the first six months of 2001, the most recent figures
available, compared with $2.3 million for all of 2000. Its lobbying team includes Washington
heavyweights like Edward Gillespie, a former official in the Bush Commerce Department and a top
Republican strategist, and former Representative Vin Weber, a Republican from Minnesota. The company
recently hired Joe Lockhart, the former Clinton press secretary, as its spokesman.

In the last week, some of this fancy footwork has paid off within the industry. On Tuesday, U.S.
Steel announced that it had gained the support of Nucor, which had been leading the opposition among
steel mini- mills, the newer and more technologically advanced rivals of old-line steel makers. With
the administration hinting that it would like to see the steel industry united if it were to push
for import tariffs, Nucor agreed to back parts of Mr. Usher's plan, including industry
consolidation.

While embracing tariffs, Nucor made it clear that it still disapproved of some of Mr. Usher's more
far- reaching pleas, especially for billions of federal dollars to help pay for generous benefit
packages for retired steelworkers.

"Our position has not changed," said Dan DiMicco, the chief executive of Nucor. "I want to make it
clear that we are very opposed to having the American taxpayer and the federal government bail out
the industry on these premium benefit packages that are not available to the average American
taxpayer who would be be asked to foot the bill."

Under Mr. Usher's plan, up to five existing steel makers would be acquired by U.S. Steel, currently
the nation's largest steel company. The consolidation would allow U.S. Steel to become much closer
in size to its two biggest rivals, Usinor (news/quote) of Europe and Nippon Sumitomo of Japan, which
are now about four times as big. Among those to be acquired would be Bethlehem Steel (news/quote),
Wheeling- Pittsburgh, National Steel (news/quote) and, possibly, Weirton Steel - all either close to
bankruptcy or in it.

But there is one big "if" to the plan - whether the government picks up the "legacy costs," or the
benefit packages for retired steelworkers that are part of the union contracts at the companies to
be acquired.

Written in much better times, these contracts provide a rich array of benefits to retirees, far
superior to most pension and health plans. To date, the liability for these costs has prevented any
potential buyers from taking over these troubled steel companies. Mr. Usher and his colleagues say
that acquiring one of them would be like buying a $100,000 house with a $500,000 mortgage.

For that reason, no one has been stepping up to buy failing steel mills. As a result, there have
been 29 bankruptcies in the last few years and at least a dozen liquidations. Most recently, the LTV
Corporation (news/quote), after two trips through bankruptcy, decided to liquidate, leaving 70,000
employees and retirees without the full array of health care and pension benefits they had expected.

Making matters worse are the demographics of the steel industry, which is burdened by a small work
force relative to the number of retirees. There are around 150,000 workers and about 600,000
retirees, according to a study by Andersen Value Solutions, a consulting firm in Washington. Retiree
dependents, who also receive benefits, add untold thousands more to the retiree benefit pool. Within
the industry, the current rule of thumb is that there is one active worker for every five retirees.

"The ticking time bomb is the retirees," Mr. Usher said. "With any company we bought, it would be
impossible to take on the health care and pension costs for the retirees."

For the moment, it is not clear exactly what costs Mr. Usher wants to shift to the government. Last
week, U.S. Steel confirmed that it was sticking to its price tag of $10 billion to $12 billion. But
many in the steel industry say the proposal may be scaled back to cover a smaller array of health
care benefits and fewer workers.

Whatever form Mr. Usher's proposal takes, the numbers involved are enormous. But so is the problem.
At Bethlehem Steel alone, Mr. Usher's prime takeover target, 13,000 active employees support 75,000
retirees. The bill for Bethlehem's unfunded pension liability comes to $2 billion, and unfunded
health care costs are $3 billion. The company's stock is trading at around 50 cents.

"We can't give this company away," said Steve Miller, the new chief executive of Bethlehem Steel, in
an interview. Mr. Miller, a turnaround specialist and a top executive at the Chrysler Corporation
when it received a federal loan guarantee in 1979, said, "Our legacy costs are greater than the
value of our company."

Mr. Usher contends that whatever the cost, it is preferable to other costs that would occur - lost
wages, human suffering and a greater demand for government benefits - if companies in bankruptcy
were liquidated and their assets sold piecemeal. "The option of doing nothing is not cost-free to
the government," he said. "The government is already on the hook for a lot of the social costs."

Rather than experience the disruptions and chaos that could occur with liquidation, Mr. Usher wants
the highly fragmented steel industry to consolidate in a more orderly way.

Yet others say a free-market alternative exists, although one less attractive to Mr. Usher's
company. That would be to allow bankrupt steel mills that are unable to reorganize to liquidate.
With their labor contracts broken, these companies would be freed of their legacy costs, allowing
buyers to step in.

Many of these steel assets would be attractive to buyers both domestic and foreign. But selling
these assets to the highest bidder would mean that U.S. Steel, rather than getting them for
practically no cash outlay, would have to compete with other buyers.

"You would have a bidding war for some of the good facilities," said William Barringer, a Washington
lawyer who represents foreign steel makers. "Buyers would end up paying some real money. I think
this is a pre-emptive strike by U.S. Steel to get this package together on its own terms."

In Washington, the main question facing Mr. Usher's plan is this: Why should the government spend
billions of dollars to aid retired steelworkers, many of whom are still in their 50's, especially
when millions of other workers have no health or pension benefits at all? The question is being
posed as Congress is facing the costly prospect of adding a prescription drug program to Medicare
for the elderly - a benefit that steelworkers already enjoy.

"It would be a dangerous precedent to have the government just bail out these guys," said Aldo
Mazzaferro, a steel industry analyst at Goldman, Sachs. "But it may happen. It would open up a whole
new territory in government subsidy. Giving money to failing companies is not a solution."

Moreover, the steelworkers' health care plan, the most costly element of Mr. Usher's proposal, is
far richer than anything most Americans have. At many steel mills, there are no deductibles and few
co- payments, 100 percent coverage at the worker's doctor of choice, and dental, vision and
prescription drug plans. One Bush administration official called it "better health care than I had
when I was a partner in a law firm earning $750,000 a year."

Michael F. Gambardella, a steel industry analyst at J.P. Morgan Chase (news/quote), said, "The
industry has a ridiculously rich benefits package compared to every other industry out there."

For that reason, Thomas A. Danjczek, president of the Steel Manufacturers Association, which
represents mini-mills, raised doubts. "Will Congress go along with paying for these health care
benefits? I think not," he said. "Do you think the AARP will go along with it? I think not." He was
referring to the lobbying group for senior citizens.

On the health care point, the steel union is particularly sensitive. "We hear this argument that no
one else gets these benefits, so why should steelworkers?" said Mr. Klinefelter, the union lobbyist.
"Well, government employees get retirement health care. If it's good enough for them, why isn't it
good enough for steelworkers?"

Steel companies agreed to such sweet benefits without setting enough money aside to pay for them -
making some people ask why they should be protected from the consequences of their own
irresponsibility.

"The key thing is to offload legacy costs that the industry unwisely agreed to years ago," said
Robert Crandall, a steel industry expert at the Brookings Institution, a research group in
Washington. "If employers agree to all kinds of wage agreements that they cannot afford, you have
huge moral hazard problems. What this industry did was agree to some unwise labor bargains, knowing
full well that the executives wouldn't be around to pick up the pieces.

"But what is amazing is their clout," Mr. Crandall added. "Surely the dot-coms have laid off far
more people than steel companies even employ and yet no one is talking about protection for failing
dot- coms."

Should Mr. Usher prevail, this aid would be the latest in a long list of government efforts to aid
the steel industry - to little avail. These have included "Buy America" programs for state and
federal construction projects, exemptions or delays in environmental regulations, a variety of
special tax breaks and abatements as well as generous government research grants.

In addition, the steel industry is the major beneficiary of the Pension Benefit Guaranty Corporation
(news/quote) - a government-sponsored insurance program that is financed by corporate pension plans.
Some 29.3 percent of all claims, over $1.9 billion, have been paid to steelworkers, more than any
other industry, since the program started in 1975. The pension corporation, which has a surplus of
$9.7 billion, covers costs when pension plans run short of money. Right now, it expects $2.1 billion
in claims from LTV steelworkers and may get another $2 billion if Bethlehem Steel is liquidated.

Moreover, because of recent legislation championed by Senator Robert C. Byrd, Democrat of West
Virginia, the steel industry is eligible for $1 billion in federal loan guarantees. In the loan
program's first year, however, only one loan was approved, for $110 million, to Geneva Steel. All
other applicants were rejected because they had no prospects for repaying the loans, according to
the plan's administrator.

To many industry analysts, the real problem facing old-line steel makers is not cheaper imports or
insufficient federal support. Rather, it is the companies' failed effort to compete with steel
mini-mills, which have been steadily gaining market share with a largely nonunion work force and
more advanced steel-making technology. Mini-mills turn scrap metal into steel by using modern
electric-arc furnaces, while steel mills use large blast furnaces and basic-oxygen furnaces to make
steel from iron ore and other raw materials, a technology stretching back a century.

While domestic steel output has remained about the same since the late 1970's - around 100 million
finished tons a year - a different mix of companies makes it. Twenty-five years ago, old- line or
"integrated" steel makers had a market share of about 90 percent. Their output has fallen by half,
while their production costs remain among the highest in the world. Mini-mills have grown in that
time from 10 million tons of output annually to around 50 million and now account for about half the
domestic market.

One mini-mill company alone, Nucor, produces almost as much steel as U.S. Steel, which traces its
roots to Andrew Carnegie. Nucor's market capitalization of $4.1 billion is greater than that of the
integrated companies combined, at $3.2 billion. With a largely nonunion work force, Nucor has labor
costs of around $45 per ton of finished steel, far lower than the $130 to $140 a ton at the
integrated mills, according to statistics complied by Goldman, Sachs.

Even more striking are the retiree benefit costs. At Bethlehem Steel, retiree health care costs come
to $26.40 per ton of steel; at Nucor, they are 27 cents a ton.

Largely as a result of this, steel costs $481 a ton to produce at old-line steel makers, compared
with $376 at mini-mills, according to statistics compiled by Mr. Crandall of Brookings. These lower
costs make it far easier for mini-mills to turn a profit.

Still, the old-line mills have something the mini-mills do not: political influence. As the debate
over Mr. Usher's proposal heats up in Washington, the steelworkers union has its battle plan, which
includes an e-mail and letter-writing campaign, telephone banks in crucial Congressional districts
and lobbying visits by steelworkers to Congressional offices.

Mr. Klinefelter, the union lobbyist, said, "we will be pulling out all the stops."