Another Chapter in Long Saga

another chapter in long saga

By Paul Giannamore
Business Editor
March 11, 2007

WEIRTON, W.Va. — It’s not every steel mill that comes with an objective historian.

But in the case of Sparrows Point, the Baltimore-area steel mill that is being sold instead of Weirton in the outcome of an antitrust agreement, the ownership of American mills by Indian billionaire Lakshmi Mittal and his company are another chapter in a long saga.

Mark Reutter is a former Baltimore Sun reporter who left his newspaper career in the 1980s to write the chronicle, “Making Steel: Sparrows Point and the Rise and Ruin of American Industrial Might,” which was first released by Simon and Schuster publishers in 1988 and reissued in 2004 by the University of Illinois Press.

Reutter has spent the past several years working at the University of Illinois at Urbana as editor of the business and law colleges, as well as editor of Railroad History, the leading journal of railroad and locomotive history. He also has written for The Wilson Quarterly and Barron’s.

He publishes regular updates to “Making Steel,” and has an extensive collection of updates, remarks and information available on his Web site, www.makingsteel.com, including Mittal Weirton Steel.

The passion of his interest in the domestic steel industry is obvious in his discussions. He said the passion is that he always was fascinated by the people, the machines, by the actual history he has learned and the encouragement he has received from steelworkers he’s interviewed and gotten to know.

He said the supplements were meant to be just a simple way to add onto the book and then to report on developments at Sparrows after the book was done. But since the sale by Wilbur Ross to Mittal, Reutter’s fascination has driven him to continue writing and researching and interviewing about the steel industry.

Reutter talks with the tone of a history professor, though he is quick to say he “doesn’t profess” at the university, and he views himself as a chronicler.

He is a sought-after speaker, most recently delivering an address to a steel fabricators conference in Orlando about the impact of concentration of ownership in the steel industry.

He doesn’t view it in a positive way.

A bit of red-hot history

On a visit to Weirton this past week, Reutter discussed how the Sparrows Point and Weirton plants have somewhat similar histories.

Sparrows Point was established in the 1880s as a steelmaking arm of the Pennsylvania Railroad. Its location was perfect to take advantage of the sources of Cuban ore that the railroad developed.

The mill was developed under the leadership of engineer Frederick Wood, and the company town by his brother, Rufus. Under these men, the mill became a leader in rail production as the steel industry moved into provision of rails for the expanding railroads. Sparrows Point became a rail supplier around the world.

During the early 20th century, the establishment of Weirton Steel occurred when E.T. Weir set out on his own at Holliday’s Cove, W.Va., seeking to build an integrated mill to feed his tin coating mills, a line he had been in since the turn of the century through ownership of Jackson Sheet and Tin Plate in Clarksburg in 1905 with a partner.

Weirton Steel grew slowly, adding mills and units, first becoming known as Weirton Steel in the mid-teens.

By then, Sparrows had been purchased by Charles Michael Schwab (not the Wall Street broker), a former Carnegie Steel executive spurned by U.S. Steel who became leader of Bethlehem Steel. Sparrows by then had hit hard times with a downturn in rail business during early World War I. Schwab turned Bethlehem into a major defense and arms supplier and moved into commercial products, including a heavier emphasis on tin, in the 1920s.

E.T. Weir formed National Steel in 1928 by combining Weirton with Great Lakes Steel of Detroit and Hanna Steel of Cleveland.

Steel, Reutter says, “was the Microsoft of its day,” with big money, big potential and filling big needs.

Reutter’s book is filled with the history of Sparrows from the days when it was a virgin swamp off the Baltimore Harbor to today, with its largely closed mill now awaiting sale by its foreign owner.

The consolidation myths

Reutter makes no secret that he does not consider the formation of ISG Steel from the steel bankruptcies of the beginning of the 21st century to have been a good development.

In recounting his extensive history, he notes that consolidation is nothing new in the steel industry. The foundation of U.S. Steel had drawn antitrust concerns in the early 1900s.

The key is always control of the industry by being able to control prices.

The recent consent decree by the Justice Department with Mittal that has led to the order to sell the sprawling Sparrows Point complex is viewed by Reutter as “closing the barn door after most of the horses have left.”

Nor is it unusual to see a steel company owner lead a lavish lifestyle.

Locally, the Williams Country Club provided a glimpse into the luxury of life of steel barons like E.T. Weir back in his heyday. At Sparrows Point, there was Schwab, who once owned a mansion and complex that filled a square block on Riverside Drive in New York City, as well as an estate in Loretto, Pa., which now is run by the Franciscan Friars, Reutter notes.

Mittal, he points out, also is leading the life, with the grand house next to Kensington Castle in London, providing a wedding worth about $60 million to his daughter, while finding ways to cut costs to the penny and not hesitating to eliminate production that misses the mark even in very minor ways.

He blames Wilbur Ross for allowing this to happen to the American steel industry, for failing to live up to his promises to the industry.

“As a prominent financier who demanded favors from government and givebacks by steel employees, he went on to fail the twin tests of patriotism and morality by letting 40 percent of U.S. flat-rolled steel production slip into the hands of a mysterious Indian industrialist living in London,” Reutter said.

What’s different now, is that steel is a mature industry and it’s not just riches being built up to gratify a rich owner.

“It’s not the case of steelworkers a hundred years ago were earning terrible wages and Schwab and Carnegie were building the biggest estates,” Reutter said. “It’s now the retirees and a sort of philosophy that was propagated by Wall Street that the entire pension and health benefit issue was repeatedly described as ‘legacy costs.’

“Well, they weren’t ‘legacy costs.’ They were the deserved benefits that were sacrificed in lieu of cash wages. They were, in my opinion, the private property, part of the earning power of the steelworkers that through quirks of bankruptcy law and the genius of Wilbur Ross in figuring out a way to do this, converted the benefits of people who had worked 40 years for a company into unsecured credit,” Reutter said. “In a deal to purportedly save the industry, they were stripped out to keep the industry going.”

Ross, Reutter said, consolidated five formerly independent steel companies and sold them to a foreign concern without any review by Congress, and Mittal was not required to guarantee minimal investment.

“He’s squeezing domestic manufacturers dependent on steel. Mittal has 40 percent of hot-rolled capacity, resulting in a cry, legitimate I think, from U.S. steel fabricators that they’re getting squeezed on prices,” he said. “And I think it’s finally being heard in Washington.”

How did we get here?

Reutter says it’s unfathomable that the unions were willing to allow the consolidation to occur.

“It’s clear there were problems and it’s clear they were desperate,” he said.

But Reutter doesn’t agree with aiming all the criticism from the steel industry during its decline solely at imports.

Problems also existed because the industry did not develop a competitive edge to deal with inroads in its core business by aluminum and plastics, going back to the 1960s and 1970s.

In his historical review, Reutter chronicles the efforts made by Sparrows Point under the Woods’ leadership to be innovative, to produce ever-heavier steel rails to serve the needs of the industry, for example.

He describes companies like Bethlehem as eventually becoming so entrenched at the top of the business that by the 1950s, the drive to innovate had stagnated. Arrogance filled the business suites of the domestic steel industry, which was struggling to keep up with demand for the ever-growing lines of consumer goods and big tail-finned cars of mid-century America. “To blame imports and environmental rules for steel’s own problems was whining,” Reutter said.

Reutter also notes that Mittal knows what he’s got in his possession.

He said the governments of India and South Africa have been tougher on Mittal than the United States. “But we act like a banana republic,” he said.

He said when Mittal was facing criticism early on in its efforts to combine with Arcelor in Europe, Aditya Mittal, son of Lakshmi Mittal and second-in-command of the steelmaker, announced the consolidated lab for steel research would be moving from the former Inland Steel labs in Chicago to a site in Europe.

He said part of the lack of innovation in the domestic industry was simply the way the research-and-development arms were built. Like Weirton’s former R&D facility off Three Springs Drive, where many breakthroughs were engineered, Bethlehem had a research lab atop a hill, removed from the steel plant with engineers who couldn’t get their ideas implemented through management into the mill. He said Weirton may have been better, but had the same problems. Inland had potential but now the lab is off to Europe.

“It is amazing how the policymakers, maybe up until this recent DOJ decision have let everything go,” Reutter said. “The politics are so fascinating, because the union has gone along every step of the way. Leo Gerard (president of the USW) said he was throwing his weight behind Wilbur Ross because Ross assured him privately he would stay in the business for a long time. The workers at Weirton know how long that was. Ross is a financier. He flipped it to a foreign owner, and for 30 years the United Steelworkers’ position was that foreign imports were bad for American steelworkers.”

But it’s nothing new under the sun

Schwab wanted Bethlehem to be the biggest in the industry.

Reutter says Mittal’s vision is similar, to be the biggest globally. The difference is that Schwab spent money to make money. Mittal makes promises in the name of vague future benefits in lieu of tangible targets.

But Mittal management makes no promises on capital expenditures while the company builds mills and makes overseas investments, Reutter said.

“The country is being robbed of its future. I think some people are beginning to wake up here, but it’s going to require some real changes since a handful of people in control are desiring to go in this direction, and the benefits I see are for their own short-term interests and self-aggrandizement,” he said.