By Aaron Bernstein
The old-line, integrated steelmakers in the U.S. have a desperation plan to save their industry, much of which has ended up in bankruptcy thanks to a worldwide collapse in demand. They propose that Washington waive antitrust law and allow U.S. Steel, one of the strongest remaining players, to buy up many of the other half-dozen big steel companies, thus creating a new, world-class competitor that should have the wherewithal to survive.
U.S. Steel CEO Thomas Usher has been making the rounds to push the idea, and the Bush Administration seems sympathetic, meaning that the antitrust issue probably won't be an obstacle -- especially since No. 3 player LTV Corp. already is in liquidation, and No. 2 Bethlehem Steel may not be far behind.
That leaves the challenge of what to do about the industry's so-called legacy costs, the $12 billion-plus the bankrupt companies will owe their current and retired workers over the next decade in the form of pension and health benefits. U.S. Steel insists that even as the lone surviving behemoth it couldn't afford the $1 billion or so a year required to pay that tab.
So this icon of capitalism wants a little government aid of the kind that its executives, over the years, have bemoaned giving just about anyone else. Well actually, it wants a lot of help: A federal promise to pay the entire amount. "Unless the legacy costs are assumed, consolidation can't happen," declares Terrence Straub, U.S. Steel Corp.'s vice-president for governmental affairs.
Sound crazy? Maybe not. For one thing, the Administration already is considering an International Trade Commission request for higher tariffs on imported steel. The ITC has found that other governments routinely subsidize their steelmakers in various ways, thus allowing them to dump (sell below-cost) artificially cheap steel on the U.S. market.
If foreign-government subsidies have enabled importers to lay low the domestic industry, why shouldn't Washington do its share for U.S. steelmakers? The pension and health benefits that the companies are on the hook for "are a trust that employers can't meet through no fault of their own, because their pricing levels were destroyed by subsidies from other countries," argues Leo Gerard, president of the United Steelworkers union, which represents the workers involved. Of course, federal aid would solve a big problem for Gerard, too, since his options for protecting his members are limited if Washington doesn't come through.
"TAKING THE HIT."
Beyond that, U.S. taxpayers will wind up footing much of the $12 billion bill no matter what happens. Most of the steelmakers' pension obligations -- Bethlehem alone is short $2 billion -- are guaranteed by the Pension Benefit Guaranty Corp. (PBGC). And at least some of the retiree health-care tab would be picked up by Medicaid and other government programs. The remaining cost to taxpayers would be about $500 million a year, U.S. Steel estimates.
Not everyone agrees with that figure, but even industry critics concede that the basic logic makes sense. "If the government is already on the hook, then maybe it's worth taking the hit now," says Brookings Institution economist Robert Crandall, a free-trader who's helping European steelmakers formulate a strategy for deflecting the ITC's tariff recommendations.
Crandall points out that the alternative is to let the bankrupt companies go through liquidation. U.S. Steel then could cherry-pick assets it wanted without worrying about delivering in full on the industry's obligations to employees. In addition to hurting workers, the process would lead to years of plant closings and other economic turmoil throughout the Midwest. And reopening plants of liquidated companies would be prohibitively expensive compared with letting U.S. Steel keep those plants going without interruption.
WHO WOULD KNOW?
It's tempting to blame the industry, the Steelworkers, and even the PBGC for not preparing better for this rainy day. But in fact, the steelmakers funded their benefits plans based upon what seemed like reasonable assumptions at the time. No one foresaw a market collapse of the magnitude that occurred last year, when prices for many steel products hit a 20-year low.
The only question now is: How to make the best of a bad situation? The Bush Administration is due to decide on steel tariffs by March. But Congress doesn't have to wait until then to pick up after the industry. In fact, Straub says U.S. Steel probably would go ahead with the consolidation plan if it were assured that the $12 billion in pension and health-care costs would be taken care of -- no matter how the trade question is resolved.
On both issues, though, the principle is the same: If U.S. steelmakers have suffered an unfair disadvantage -- and if the low steel prices that have resulted have benefited everyone from contractors to manufacturers to consumers of cars and appliances -- then maybe the public should have to pay for Washington's willingness to welcome underpriced steel imports.
Bernstein covers labor and workplace issues from BusinessWeek's Washington bureau