SAVING STEEL

THE BALTIMORE SUN

WITH ORDERS for steel plunging and the new owners of Baltimore County's Sparrows Point steel mill scouting for places to cut costs, labor leaders and management at the plant sat across a table from one another in May and did something that rarely happened in the 87 years the plant was operated by Bethlehem Steel.

They agreed.

Gone were the days when the two sides could afford the kind of stalemate that doomed the once-mighty industrial giant to bankruptcy and cost thousands of Maryland workers their pensions and health care benefits. The new way of making steel on the shores of Chesapeake Bay called for innovation and cooperation in the face of global threats.

In the weeks that followed, steelworkers and management at the sprawling mill came up with a package of temporary layoffs and cost cuts that saved Mittal Steel Co. $4 million in June and $6.8 million in July.

The Netherlands-based multinational, which bought the plant about a year after Bethlehem had sold it in bankruptcy to International Steel Group Inc., was so impressed that it instead idled a blast furnace in Weirton, W.Va., and moved much of the work to Sparrows Point until the market rebounds.

"The steel is going to go to the most cost-effective plant," said William Brake, an executive vice president who oversees Mittal's operations in the eastern United States. "[Sparrow's Point General Manager] John Lefler and [Steelworkers President] John Cirri have really stepped up to the plate and on their own have come up with some aggressive and breakthrough thinking in the way they run that plant to be more cost-effective. In a down market, you compete for your tons."

The episode is symbolic of the seismic shift in both labor relations and efficiency that has taken place at Sparrows Point in the years since the plant came perilously close to extinction during the reorganization and subsequent sale of Bethlehem Steel to ISG in 2003.

But it also points to the dangers the aging mill still faces as it strains to hold its ground within a global steel company that is locked in its own battle for supremacy in a fragmented world market. Mittal and its next largest rival, Arcelor SA, own just 15 percent of the world's steel-making capacity despite years of industry consolidation.

Lakshmi Mittal, an Indian-born entrepreneur who created a steel empire by buying up distressed plants in 14 countries, formed Mittal Steel in April with the purchase of ISG for more than $4.5 billion in cash and stock. The deal created by far the largest steel producer in the world with $31.8 billion in sales and 165,000 employees.

The timing was awful. The transaction occurred in the middle of an industry downturn that has seen spot market prices for hot-rolled steel fall 39 percent, to $460 a ton last month from a peak of $756 a ton in September, according to Purchasing, an industry trade magazine.

Mittal has responded by cutting production companywide by 1 million tons while pledging to make the business grow and keep all of the former ISG plants operating. But the deal left some at Sparrows Point wondering whether the owner's reputation for centralized control and cost-cutting might lead to permanent job cuts or a disruption in the new culture of cooperation and independent thinking at the plant.

At stake are nearly 2,500 high-paying jobs and the future of a manufacturing powerhouse that is woven into the history and culture of Baltimore's blue-collar neighborhoods.

'Anxiety'

"There is anxiety, but it's because of what we went through with Bethlehem," said Cirri, president of United Steelworkers of America Local 9477. The union gave its blessing to the sale of ISG after Mittal pledged to maintain the union's existing contract and grow jobs.

"We all thought pensions were guaranteed," Cirri said. "We all thought jobs were guaranteed, and Bethlehem taught everybody a lesson: Nothing is guaranteed."

Company officials say workers at the plant have nothing to fear, and the union and most analysts expect Sparrows Point to benefit from Mittal's global access to raw materials.

But banishing the ghost of Bethlehem Steel, which employed nearly 31,000 steelworkers at its peak in 1959, will be one of Mittal's challenges. The fear and insecurity among workers remain a powerful force at Sparrows Point two years after the plant was revitalized by ISG.

Despite Mittal's assurances about jobs, some workers say rumors of layoffs and plant shutdowns swirled when the company's sale became public in October. Some considered retirement, while others rushed to use up vacation time out of concern they might soon lose it. But hardened steelworkers who have seen their paychecks signed by three different owners in three years are mostly philosophical about the mill's prospects.

"I don't listen to no rumors," said Robert Madison, who works in the control room of the plant's huge blast furnace - the heart of Sparrows Point.

The furnace is housed in a sweltering hulk of a building blanketed in a fine dust accumulated from decades of melting iron. A beefy steelworker who looks younger than his years, Madison came to Sparrows Point at age 17 and has been punching the clock there for 35 years. "There's nothing I can do about it," he said of the job fears. "That's something we don't have control over, so all we can do is keep him [Mittal] happy. I hope we can."

A year ago, workers at Sparrows Point were on a high. Steel prices were climbing, the plant was churning out metal at maximum capacity and paychecks were overflowing with overtime and profit-sharing dollars from ISG. The profit-sharing bonuses, nearly $8,000 per worker last year, were built into the revolutionary contract that steelworkers negotiated with ISG founder Wilbur Ross when he bought the bankrupt assets of Bethlehem Steel, LTV Corp., Acme Steel and Weirton Steel for pennies on the dollar.

"People made more money in the last year and a half than they ever made under Bethlehem Steel," Cirri said.

Industry analysts say it was because of the contract that ISG was able to turn things around at Sparrows Point and revitalize the U.S. steel industry. It allowed ISG to shed almost one-third of Bethlehem's work force, implement flexible work rules and reduce job classifications from 32 to about a half-dozen. Pensions for thousands of Bethlehem retirees were stripped from the balance sheet and turned over to the federal Pension Benefit Guarantee Corp.

United as partners

Despite the pain of those cuts, labor and management were united as partners under ISG. At Sparrows Point, the two sides have met regularly in the past few years, discussing business openly and often making rapid decisions to adapt to market threats.

"Under ISG, each plant was kind of its own entity," said Lefler, the plant manager.

The formula worked. Ross was quickly getting rich off his $1.5 billion gamble on Bethlehem Steel, and the industry waited in expectation of his next acquisition. When news broke in October that he was instead selling to Mittal, employees were stunned. Since then, it's been a waiting game to see if Mittal will maintain the momentum gained under Ross.

"We don't need to be interrupted from the trust and faith and the teamwork we've had over the last few years," Lefler said. "I don't see that happening, but we want to make sure it doesn't get interrupted."

On paper, Lakshmi Mittal and ISG's Ross are a lot alike. Both built cash cows out of dying steel plants bought on the cheap, and both have become very wealthy. Mittal's family retains an 88 percent stake in Mittal Steel, placing them among the ranks of the world's richest billionaires.

Mittal took a $2 billion dividend as part of the ISG acquisition, adding to a net worth that Forbes puts at $25 billion. That's enough to make him the third-richest person in the world behind Microsoft's Bill Gates and investor Warren Buffett.

He is known for his lavish lifestyle, recently buying a $100 million mansion in London's Kensington Palace Gardens and spending an estimated $60 million on his daughter's wedding in Paris, which included a dinner at the opulent Palace of Versailles, according to news reports that chronicled the five-day affair.

Eye on yacht

Recent reports out of Britain say Mittal has his eye on Oracle billionaire Larry Ellison's 452-foot yacht, Rising Sun.

The billionaire's lifestyle hasn't gone unnoticed by steelworkers, some of whom keep track via the Internet. But in business, Mittal is just as famous for his focus on costs, a quality analysts say is what makes him a survivor in a cut-throat industry that has seen its share of hard times.

"I'm a big fan of their methodology," said Charles Bradford, an analyst with Bradford Research-Soleil Securities in New York, referring to Mittal's management-by-numbers style and eye for profitable acquisitions.

His style appears much more top-down than was typical under ISG, industry experts said. At Sparrows Point, the accounting, sales and purchasing departments report directly to headquarters instead of to plant management.

Data collection

Data are constantly collected from the mills, and plant performance is benchmarked against others in the company in a form of friendly rivalry. Managers are encouraged to participate in a knowledge-sharing program aimed at spreading the most successful production techniques around the globe.

"We just send data, data, data every day because they want to see what's happening in the business," Lefler said. "They're very involved, but they have not at this time interfered with what we need to run the business, and the structure has not hindered us in doing our business the way we were before."

Still, the emergence of new management layers - which many blamed for Bethlehem Steel's failure to adapt in a changing market - has not gone unnoticed.

"You don't have to have 70 million tons [of capacity] to be successful, to have a bright future and make money," said Peter Morici, a business professor at the University of Maryland, College Park and a steel industry analyst. "So it isn't clear to me that you don't build up bureaucracy with such a large company that is not offset by cost savings."

The steelworkers union says it crafted its contract with ISG to protect against runaway bureaucracy, but leaders are watching the situation closely.

"Like with everything else, when you get something this big you worry ... Does it become another big Bethlehem Steel and you find yourself back where you were?" said Tom Conway, a vice president and top negotiator for the United Steelworkers of America. "We don't think that's the case here."

Brake, the Mittal executive, insisted that global competition and a fast-changing market have forced an end to the days of top-down bosses and autocratic rule in the steel industry.

"The Mittal business model is very clear that the only top-down expectation is that you really open your eyes and check your calculator and figure out how to run the business and try new things," he said.

Put to the test

Sparrows Point put that to the test with its go-it-alone approach to cost-cutting in May. Labor and management teams led by Cirri and Lefler came up with more than two dozen cost-cutting projects to counter a 30 percent drop in the plant's business.

At its core were staff reductions. But rather than cut jobs indiscriminately, the two sides came up with a plan to let workers volunteer for a temporary layoff. About 115 agreed, giving management the cost-savings it needed.

But the pain wasn't just felt by labor. Outside contractors hired to do construction and maintenance were booted out, saving about $1 million a month. Little-used buildings on the 2,000-acre campus were shuttered, and management adopted a policy to shut the production line on hot afternoons when electricity costs can quadruple. The target was to net $6.4 million a month in savings once all of the projects were in place. They exceeded that by about $400,000 last month.

'It's a joint effort'

"If this were still Bethlehem Steel, of those 25 cost reductions, 24 of them would have been labor," Cirri said. "That's how far we've come in that short two-year period from the Bethlehem way to the ISG way, and hopefully still the Mittal philosophy. It's a joint effort. We work together."

So long as it produces results, Mittal seems content to let Sparrows Point do its thing. Elsewhere, the company has idled four blast furnaces in Cleveland, Weirton and outside of Chicago to cut production until demand returns. About 700 workers were idled at Weirton when their work was shifted to Sparrows Point and a plant in Cleveland.

Industry analysts say there are signs that demand could rebound late this year, but most think Mittal will keep its idle furnaces off line beyond that time. The company reported a 15 percent decline in second-quarter profit to $1.09 billion and announced plans to cut production 8 percent in the third quarter. Meanwhile, workers at Sparrows Point are staying focused on the bottom line.

"As long as the gates are open when we come to work, it don't worry me," said Richard Woodall, an operating technician who joined Sparrows Point three years ago and hopes to retire a steelworker. "We're here to work. Until something happens, we're here to work."

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