Fate of US Steel Canada In Question

US Steel Canada has been losing money over the last five years to the tune of $2.4 billion.

“Despite substantial efforts over the past several years to make US Steel Canada profitable, it is clear that restructuring US Steel Canada is critical to improving our long-term business outlook,” said Michael McQuade, president and general manager of U.S. Steel Canada in a statement.

The announcement was not unexpected. At the end of last year US Steel permanently shut down steel making operations at Hamilton Works and in July, union leaders at Hamilton Works and Lake Erie Works were invited by US Steel to discuss restructuring plans. Union officials walked away from that opportunity after refusing to sign a confidentiality agreement.

Pension funding has been a major issue for the Canadian operations with US Steel falling short of its required investment to fund retirement incomes. In its most recent valuation, US Steel had a pension deficiency of $838.7 million. A pension fund agreement with Ontario includes a $150 million loan that is due at the end of 2015. According to a recent article in the Globe and Mail, US Steel is scheduled to make additional pension contributions of $117-million in 2016, $105-million in 2017 and $80-million in 2018.

As of June 30, the Canadian operations represented approximately $1 billion of US Steel’s consolidated employee benefits liability. There are approximately 15,000 pensioners in Canada who will be affected by the restructuring of US Steel Canada as well as the 2000 current employees.

US Steel has a history of labor disputes with its Canadian operations, with multiple lockouts at Hamilton and Lake Erie Works since US Steel acquired the former Stelco Company in 2007. The most recent lockout was at Lake Erie works which ended after four months in late August 2013. Hamilton’s contract (USW Local 1005) expires October 15, 2014 while the Lake Erie Works (USW Local 8782) contract will expire in September 2018.

A union source commented by email to SMU, “USS Canada, according to the CCAA process, honors the contract, but the purpose of the CCAA process is to get the union to agree to give up wages, benefits, etc.”

An agreement by US Steel with the government to operate in Canada also expires at the end of 2015. The terms of the agreement, under the Investment Canada Act, have been a point of contention for Canadian workers at US Steel for years. Union officials have unsuccessfully campaigned for full disclosure of the agreement. Speculation by some analysts says US Steel may sell Hamilton but keep Lake Erie works which has an annual steel capacity of 2.6 million tons.

New York based steel analyst Charles Bradford told SMU, “It appears that US Steel wants to dispose of their assets in Canada.” He noted that a potential buyer would prefer to buy something without liabilities, thus the bankruptcy filing. Bradford added that it was likely both Hamilton and Lake Erie would be offered for sale in order to raise enough cash to cover creditors and pensions. Hamilton, despite union wishes to the contrary, would be physically impossible to return to steel making without a hot strip mill, said Bradford. Lake Erie works is a good producing mill and the Z-line at Hamilton would be an attractive asset for a buyer, he said.

USW Local 8782 President Bill Ferguson, who was outspoken in the Lake Erie lockout, was quoted as saying it was too early to make educated guesses about the impact of the announcement by US Steel.

US Steel has appointed William Aziz of Blue Tree Advisors II Inc. to lead the restructuring effort. Union leaders attended a meeting on Wednesday, October 17 to learn more about the recent CCAA filing and potential restructuring plans.

US Steel Canada’s operations are located at Lake Erie Works in Nanticoke, a fully integrated steelmaking facility and at Hamilton Works, a cokemaking and finishing operations that includes a premier zinc-coating facility, the Z-Line. US Steel Canada has the capability of producing approximately 2.6 million tons of steel annually and employs approximately 2,000 people.