If International Steel Group Inc. acquires Bethlehem Steel Corp.'s mills, the company would become a major domestic producer with access to new and potentially lucrative markets. It would also become a model for a leaner, lower-cost U.S. industry that faces competition from larger foreign rivals.
Cleveland-based ISG would roughly double in size and gain significant steelmaking capacity for the automobile, construction and appliance markets in buying Bethlehem's crown jewels - its plants at Sparrows Point in Baltimore County and Burns Harbor, Ind. - as well as smaller operations in Pennsylvania and New York.
With the ability to ship 16 million tons of steel annually and a 20 percent-25 percent market share, a bulked-up ISG also would help give a fragmented steel industry better leverage in negotiating prices, experts said.
Management at Bethlehem, which has operated under bankruptcy protection since October 2001, is evaluating ISG's $1.5 billion offer, along with creditors.
ISG's offer last week was seen by many as the first major move toward the consolidation that the battered industry has said is necessary to compete against cheap imports and giant producers such as Luxembourg's Arcelor, which makes about 50 million tons a year, South Korea's Posco and Japan's Nippon Steel Corp.
More than 30 U.S. steel companies have filed for bankruptcy since 1997, and 50,000 jobs have been lost. In March, President Bush, yielding to industry and union pressure, imposed a controversial three-year tariff program on some foreign steel imports to give the industry breathing space.
Pittsburgh-based U.S. Steel Corp., the country's largest steelmaker, lost no time in announcing an offer Thursday to buy the steelmaking assets of bankrupt National Steel Corp. for $750 million in a move that would solidify its No. 1 position, with 25 million tons annual capacity.
Key to that deal is U.S. Steel's ability to negotiate a new labor contract with the union that parallels the one reached at ISG last month.
Experts said ISG's purchase of Bethlehem would spur further consolidation and increase the industry's leverage with major customers, such as automobile manufacturers.
With a less fractured steel industry, steelmakers could extract better prices from their automobile clients after years of being in a weaker bargaining position, said Donald Barnett, a steel expert with Economic Associates Inc. in Virginia.
"The fact is, making steel [for the automobile industry] has cost steelmakers a lot more money but you haven't necessarily gotten paid a lot more for it," Barnett said.
But ISG's potential purchase isn't the only recent catalyst for consolidation among steelmakers. ISG reached a labor agreement with the United Steelworkers of America last month that ties workers' compensation to company production and profitability - a tactic that will help it weather softening in the steel market.
If ISG succeeds in buying Bethlehem Steel, it plans to use the new labor agreement to restructure the company and trim its work force, which now stands at 12,000, including 3,300 at Sparrows Point.
A Bethlehem spokeswoman said that Bethlehem workers would be covered under ISG's union contract if the acquisition is completed.
ISG employs about 3,000 workers - 70 percent fewer than were employed by LTV Corp., whose assets ISG bought in bankruptcy court. But Bethlehem's plants and work force are more varied, with differing staffing requirements.
25%-40% job cut
Steel experts estimate that Bethlehem's work force could be reduced by 25 percent to 40 percent. Wayne Atwell, a Morgan Stanley steel analyst, estimated in a report that manpower reductions at Bethlehem plants could save $160 million to $190 million annually.
Mitchell Hecht, ISG's chief financial officer, wouldn't say how many jobs ISG was looking to cut at Sparrows Point and other Bethlehem operations. But he did say that management cuts would be deep.
"We believe in an extremely thin corporate staff, which may be 5 percent of the level that you would find in a traditional integrated facility in corporate headquarters."
ISG also would shed Bethlehem's huge obligations for retiree benefits. Bethlehem's underfinanced pension fund was terminated last month by the federal government.
A larger and leaner ISG would bring "huge pressure" on domestic competitors to seek similar labor agreements with the steel union, said steel expert Charles Bradford.
"I had figured that ISG may have as much as a $100 per ton advantage vs. the average integrated company [which makes steel from raw materials]. That's not sustainable [in the steel industry]. That is a monumental advantage," he said.
Some competitors aren't too worried about their battered rivals' moves toward consolidation - and see it as a healthy development that's been long overdue.
Daniel R. DiMicco, vice chairman, president and chief executive of Nucor Corp., said his company is "more than comfortable competing with everyone out there."
As a "minimill" that recycles metal - as opposed to making it from ore the way Bethlehem does - Nucor has significantly lower production and labor costs. It competes directly with ISG on flat-rolled sheet products, but DiMicco isn't too worried.
"Both of these moves are good for the industry," he said, referring to ISG's and U.S. Steel's respective offers. "They will help the industry be more profitable, more cost effective and compete with imports."
Even with Bethlehem, ISG still faces plenty of competition from foreign and domestic companies, concedes ISG Chairman Wilbur L. Ross Jr.
But buying Bethlehem's mills would give the company a "substantial jump" in selling steel to such domestic clients as the automobile makers, Ross said. Bethlehem's Burns Harbor plant is a major steel supplier to the U.S. auto industry.
ISG is also looking to capitalize on economies of scale as well as greater geographical reach, top ISG officials said.
Deep-water port
Bethlehem's Burns Harbor plant is close to ISG's plants in Ohio, Illinois and Indiana - and that could translate into efficiencies in plant maintenance and shipping. And in Sparrows Point, ISG would get a facility with access to an important deep-water port, company officials said.
Products made at the 2,200-acre plant - such as steel for the construction industry and tin for canning - would also broaden the mix of products ISG offers, company officials said.
Bethlehem also has a plant in Lackawanna, N.Y., and several more throughout Pennsylvania that make rails, bar, pipe and plate - markets that ISG, for the most part, has yet to penetrate. "The important thing in any commodity business is to be the low-cost producer," Ross said.
While an ISG acquisition of Bethlehem's plants is being watched closely by domestic steel companies, some experts said that the deal would barely be a ripple to foreign competitors.
"Their impact on the global scene would be minimal other than that it would make them [ISG] more competitive here," said Atwell, the Morgan Stanley analyst.
"It's more likely that this would give [ISG] an exceptionally low cost structure" that would help make it more competitive with imports, he said.