The purchase of the Sparrows Point steel mill by an Esmark Inc.-led venture does not guarantee the plant will live long and prosper. But the deal gives it the best possible chance to do so.
With Esmark bosses in the office and 2008 on the calendar, the mill will get focused management and a cheap U.S. dollar. That's a favorable combo it hasn't had in a long, long time. And the dollar might be the more important of the two.
The group buying Sparrows Point includes Chicago-based Esmark, Wheeling-Pittsburgh Steel Corp., Brazilian miner CVRD and the Ukrainian Industrial Union of Donbass. Antitrust regulators are forcing Luxembourg's ArcelorMittal to sell Sparrows Point to break up an ownership concentration in tin-plate steel plants. The sale was disclosed last week.
With ArcelorMittal, Sparrows Point is a screwdriver at the bottom of a big, cluttered toolbox. Mittal is the world's largest steelmaker. The Point's 2,450 employees represent 1 percent of its operation. The Baltimore County mill competes with numerous sister plants for customers and capital.
At the Esmark consortium, Sparrows Point will be the marquee asset, the place managers take visitors when they really want to impress. True, it'll compete with Wheeling-Pitt facilities for resources. But with assets Wheeling-Pitt lacks - a deep-water port and a better blast furnace - it will have a good chance of winning.
Of all the reported or potential bidders for Sparrows Point, Esmark seems likeliest to invest the millions that will be needed to reline the blast furnace and keep it operating after 2012 or so. Many suitors probably would have eventually removed Sparrows Point from the business of smelting ore into metal, relying on imported steel chunks instead.
One Esmark investment partner is CVRD, a mining giant based in Brazil, one of the world's top sources of iron ore. The idea is to ship CVRD ore to Maryland and have Sparrows Point continue doing what it has done for a century: make steel from scratch.
Soaring prices for scrap steel - the raw material for Sparrows Point's "mini-mill" competitors - make the case for keeping the blast furnace even stronger. The resulting metal can feed Sparrows Point's finishing lines as well as those of customers inside and outside the Esmark venture.
Esmark's group hasn't revealed the price and terms of the transaction. But it figures to be mostly equity, which would allow debt-financed plant upgrades later on. Besides the Brazilians and Ukrainians, Esmark's partners include undisclosed institutional investors.
Motivated owners. A strategic plan. A great balance sheet. What else could you ask for? The cheapest U.S. dollar in a decade, which will make Sparrows Point much more competitive against imported steel.
People blamed many factors for the demise of Bethlehem Steel, Sparrows Point's original owner. The pension and health care costs were too high. The workers made too much money.
But from an international perspective, the soaring U.S. dollar in the 1990s and early 2000s - up 50 percent against key currencies - added more cost per ton to American steel than any other factor. The strong dollar made Sparrows Point steel expensive and imported steel cheap.
Now the situation has reversed. The dollar hasn't retraced all its gains, but it's at its lowest point since the 1990s, as measured against currencies of U.S. trading partners.
Over the long term, the correlation between a low dollar and profitability for American steelmakers "is incredible," says John Anton, who follows the industry for Global Insight. A weak dollar is the second-most-important factor associated with strong profits after low inventory levels, he says.
Yes, a weak dollar also makes imported ore more expensive. The United States is just about out of iron ore, so Brazil is the major source. Like other major currencies, the Brazilian real has been appreciating against the dollar.
Still, the net result is a plus for Sparrows Point and other U.S. steelmakers, analysts say. The weak dollar that makes imported ore more expensive also raises prices for Sparrows Point's most potent competitor - imported finished steel.
"As the dollar has gotten weaker it has made imports noncompetitive," Anton said. "Imports used to be the first place to go if you wanted to save money. Imports have become the last place." He expects the dollar to stay cheap for years.
That puts the plant in great shape, even after weighing the problems of the Detroit carmakers, a major customer.
Who knows? Maybe Sparrows Point could even start exporting. "It's located well for it," says steel analyst Charles Bradford.
The mill will never return to the 30,000 employees it had in its heyday. But its chances of being around and making steel in 2020 look better than they have in a while.