ArcelorMittal (NYSE:MT) continued to remain in talks with United Steekworkers union (USW) for a new labor contract even after a Saturday midnight deadline passed with no agreement. The management hasn’t ordered a lockout and USW has told its members to keep showing up at work instead of going on strike. The option to strike, however, remains on the table if negotiations break down going forward. U.S. Steel (NYSE:X), on the other hand, has managed to reach a tentative three-year labor contract agreement with USW. Union members will now cast a deciding vote on the agreement over the next few weeks. 26,000 workers belonging to USW work at various ArcelorMittal and U.S. Steel facilities. Workers at ArcelorMittal will continue to work under the terms of the contract negotiated in 2008 while the negotiations are ongoing, even though the 2008 contract has not been formally extended. ((UPDATE 1-U.S. Steel, union reach tentative agreement, Reuters))
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Why Negotiations Have Dragged On
Negotiations this year have been particularly hard-nosed on both sides. This can be attributed to the weak economic conditions in general. Sluggish economic conditions at home and abroad have depressed demand and prices for steel, resulting in production cuts and idling capacity. Some plants have had to be idled completely while some were relocated and others sold off. Therefore, understandably, steel companies are in no mood to offer generous terms in renewed labor contracts. They are seeking wage and pension cost reductions to help tide over tough times. Workers, on the other hand, loath to see their wages cut or benefits reduced. There is a feeling that economic inequality has widened over the years and it’s unfair to ask the lowest paid workers in the economy to bear the brunt when media keeps reporting inflated pay packets for top executives.
ArcelorMittal has been seeking wage and benefit reductions by $28 an hour, the elimination of retiree health care for employees hired after the expiry of the current contract, union commitment to waive the right to bargain for a retiree health cover in future, a freeze on the pension plan with no future increases, and blocking those hired after September 1, 2012 from joining the pension plan. The company wants all employees hired after September 1, 2012 to be eligible only for the 401k plan, under which a company is obliged only to match the employee’s contribution to the pension fund and takes no responsibility to provide a fixed rate of return on the plan. USW has reported that ArcelorMittal has now backed down from its demand for no pension to future hires. ((ArcelorMittal workers won’t strike for now, Cleveland))
On the other hand, we believe that USW also faces certain limitations. It cannot afford to harm the general image of labor unions during an election year. It also knows that a shutdown of ArcelorMittal’s U.S. plants will do little harm to the company as it has sufficient capacity in Europe and Canada to replace lost production. We believe that the decision not to strike work after the deadline went past had a lot to do with these considerations. ((USW, U.S. Steel Agree On Tentative 3-year Labor Contract, Nasdaq))
ArcelorMittal has taken certain “asset preservation” measures as a precautionary measure in the event that talks break down. These include taking blast furnaces and coke ovens offline to ensure they are properly maintained in the event of a strike. The USW says that it’s concerned that ArcelorMittal is preparing to ‘‘hot-idle” its U.S. coke plants, a procedure that temporarily halts output. According to the union, such a measure could damage the plant and therefore it is taking all steps to ensure that in event of a work stoppage, the coke operations remain viable and the plant is able to resume production. ((ArcelorMittal Backs Off on Pensions in Talks, Union Says, Bloomberg Businessweek))
We believe that ArcelorMittal could lose market share if a strike indeed occurs. On the other hand, we think that halting production would take out some of the excess capacity in the steel industry and help to prop up prices a bit. ArcelorMittal had a net debt of $22 billion as of June 30, and had its credit rating cut by Standard & Poor’s as well as Fitch in August. Given that the company can’t reduce its debt pile much without further divestment of non-core assets, we believe that if pushed too far, it may decide to shut down some of its plants in the US. This would result in jobless workers, something we believe the USW would like to avoid and should provide incentive to find a middle ground. We believe that the USW may come around to accepting a moderate pay cut on a temporary basis, to be renegotiated once the economy picks up. As for retiree health benefits, it’s still anybody’s guess which side will ultimately prevail.
We recently revised our price estimate for ArcelorMittal from $22 to $18, implying a premium of about 20% to the current market price.