Salvation from the Shop Floor

The Steelworkers' Leo Gerard is on a rescue mission

Leo W. Gerard is finally getting his way. Ever since he took over as president of the United Steelworkers of America (USWA) two years ago, Gerard has been banging the drum for industry consolidation, arguing that the nation's steel companies have become too small to survive in today's global market. He even tried to play behind-the-scenes matchmaker, first urging U.S. Steel Corp. (X ) to scoop up LTV Corp. as it went out of business in late 2001, and then Bethlehem Steel Corp. as it limped along in bankruptcy in 2002. No deal happened, though--until now.

On Jan. 7, International Steel Group Inc. (ISG), a new entity that bought LTV's assets last spring after U.S. Steel hesitated, offered $1.5 billion for Bethlehem's assets, to form the No. 1 producer in North America. Two days later, U.S. Steel did ISG one better, announcing a proposal to pay $950 million for most of the assets of bankrupt National Steel Corp. The plan would create not only an even bigger U.S. producer but also the world's fifth-largest steel company.

The new deals may well rescue the long-suffering U.S. steel industry, which has been sliding toward extinction. Together, the two buyers would control 35% of the U.S. market, enough to stand up to big customers and suppliers on pricing. They also would have the broader product lines and higher productivity needed to stand up against giant rivals in Europe and Asia. That should save at least some of both companies' high-paying union jobs, which is why Gerard has been pushing mergers so hard--and is willing to give historic concessions to make them happen. The consolidation "improves the prospects of having a U.S. steel industry for the next 50 years," says Bethlehem CEO Robert S. "Steve" Miller Jr. And he gives Gerard much of the credit: "His willingness to step up and do what has to be done for the survival of the industry is truly noteworthy."

In fact, Gerard is probably the only person in a position to pull it off. Knowing how close to a shutdown many steelmakers are, he has put into motion a drastic industry restructuring almost entirely on the backs of his members (table). He is allowing the merged companies to dump most of the enormous pension and retiree health-care costs that weigh down an industry with 600,000 retirees--and only 124,000 active workers. It's the ultimate irony that after a long history of bitter clashes with management, it has taken a labor leader to salvage what's left of Big Steel.

A gregarious bear of a man, Gerard also is permitting companies to shed thousands of steelworker jobs and do away with long-standing work rules. Now the new companies will be able to match or even top productivity levels anywhere in the world. A hard sell to USWA members? Perhaps, but it's better than the loss of even more jobs and retiree benefits, argues Gerard. "I don't want to accept that some folks are going to get sacrificed," he says. But "we're not going to be able to sustain all the retiree benefits. It keeps me awake at nights."

In many ways, Gerard, a 55-year-old Canada native, has been managing an orderly retreat since 1985, when he was elected director of the union's Ontario district. Even then, the young leader recognized that North American steel companies had to become ever more productive to compete against low-wage and subsidized mills overseas.

Gerard proudly cites what has happened at Inco Ltd. (N ), where his father, Wilfred, was a nickel miner and union organizer and where Gerard got his first job out of high school in 1965. Over the past 25 years, employment at Inco's operations in Sudbury, Ont., has fallen to 3,400, from 13,600. "Hardly anybody works in the smelter and mines anymore," Gerard says. But hourly wages remain high, and the rank and file, represented by the USWA, are entitled to profit-sharing. "We've negotiated very strategically," he adds.

In LTV's case, Gerard has given more concessions than ever. After failing to interest U.S. Steel in rescuing the Cleveland-based company, Gerard turned to New York financier Wilbur L. Ross Jr., who had been on the union's backup list thanks to his interest in bankrupt companies (below). Ross told Gerard he could make money restarting LTV's mills, but only if he didn't have to assume the $2.3 billion in retiree obligations that helped drag LTV under.

To escape those debts, Ross proposed buying only LTV's physical assets, leaving behind a shell company that retained the obligations to the company's 70,000 retirees and dependents. He also promised to hire back laid-off workers based on seniority and to negotiate a new union contract. Gerard agreed, and the deal went through last April.

The LTV shell has essentially been liquidated as expected--leaving retirees with no health insurance. They and active workers also have greatly reduced pensions that now are the obligation of the federal Pension Benefit Guaranty Corp.

Since then, the deal has become the industry standard. At Bethlehem, ISG is demanding the same terms from the union so it can avoid $2 billion in retiree health-care costs. U.S. Steel also has structured its takeover of National Steel as a purchase of assets only, cutting out 35,000 retirees and dependents.

Gerard doesn't like any of this but is convinced he has made the best move. At ISG, for example, 2,750 LTV employees who would all be unemployed today have been rehired. They make up to $20.50 an hour under the union's new contract, the highest rate in the industry, plus profit-sharing. The pact also set up a pension for new employees and a trust fund, based on future profits, that eventually could replace at least a small part of current retirees' lost health coverage.

ISG's model may be the only way to make the U.S. industry competitive. With declining payrolls, unburdened balance sheets, and greater economies of scale, ISG and U.S. Steel should be more profitable. Gerard hopes they might even earn enough one day to restore retiree benefits. So far, he has saved at least some of his members from losing everything. But the winner's circle has never been smaller.

By Michael Arndt in Pittsburgh

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