Union opposition to US steel sales reflects years of bad relations

David J. Lynch
| Washington Post

U.S. Steel’s glory days, when its products shaped landmarks from the Chesapeake Bay Bridge to the New Orleans Superdome, are long gone. With its CEO saying there’s no money to modernize the aging mills that employ thousands of union workers, it seems like the perfect time for a partner with deep pockets and industry know-how to step in.

But that doesn’t happen.

While investors welcomed the proposed $14.9 billion takeover of U.S. Steel by Japanese company Nippon Steel as the once-iconic steelmaker’s best chance to survive in an increasingly unforgiving global market, the United Steelworkers union immediately objected.

In any other year, union opposition might have been a problem for supporters of the deal, but not an insurmountable one. But in an election year, when working-class votes could decide the winner in battleground Pennsylvania, and the winner of Pennsylvania could decide who wins 270 electoral votes and the presidency, a powerful union would seem to enjoy near-veto power.

In an interview, David McCall, president of the USW, seemed confident of the final outcome.

“At the end of the day,” he said, “US Steel will remain an American company, American-owned and American-operated.”

The deal is currently in a kind of limbo. The president of the United States has publicly opposed it, as have both major-party candidates who are expected to replace him in the White House. A government commission has identified national security concerns. A final decision is likely to be made before the end of the year.

The unexpected obstacles have raised alarm bells among foreign investors. If a corporation from Japan, one of the United States’ closest allies, can encounter such difficulties, what transactions will be safe from the Americans’ embrace of economic nationalism, they ask.

Meanwhile, the union is hoping for an alternative offer from a domestic steelmaker, which most analysts say would raise antitrust concerns. Otherwise, an independent U.S. Steel company would likely face thousands of union layoffs and a potential relocation of its headquarters from Pittsburgh, the company said.

“The union is making a mistake. Nippon’s ability to come in and recapitalize and re-energize this mill is something that seems to be overlooked. I think Nippon has the ability to create more jobs and save jobs,” said John Packard, a retired steel industry executive and consultant.

The origins of union opposition to the plan to sell US Steel to a Japanese steelmaker date back years before the deal was proposed.

In 2021, two years after promising to transform U.S. Steel’s Mon Valley Works into “the most innovative steel mill in the United States of America,” U.S. Steel CEO David Burritt canceled a planned $1.2 billion upgrade to the aging plant.

The company blamed delays in obtaining environmental permits needed to overhaul the steel mills, which date back to 1901. But that decision came just months after Burritt spent nearly $800 million to buy Big River Steel, a nonpartisan mill in Osceola, Arkansas.

For union leaders, the decisions confirmed Burritt’s move to reduce the emphasis on steelmaking in traditional blast furnaces operated by USW members in favor of electric arc mills that rely on a smaller, nonunion workforce. Today’s episode explains why McCall, the USW president, scoffs at Burritt’s promises that taking over Nippon Steel would revitalize aging mills outside Pittsburgh.

“It’s become more and more contentious since Burritt’s been there. … Our relationship with them is not good,” McCall said.

Opposition to selling the country’s third-largest steelmaker to a Japanese rival is a rare topic of agreement between Vice President Kamala Harris and former President Donald Trump, who both say it’s crucial for U.S. Steel to remain under American ownership, as has President Joe Biden.

The Committee on Foreign Investment in the United States, an interagency body chaired by Treasury Secretary Janet Yellen, has raised potential national security concerns about the deal, prompting skeptics to charge that political considerations infected the review. Biden is expected to block Nippon Steel’s bid once it receives a formal recommendation from CFIUS later this year.

The friction between McCall and Burritt also helps explain why the union wants Cleveland Cliffs, another domestic steelmaker that enjoys warmer relations with the USW, to buy U.S. Steel.

“It’s a bit like Billy Joel’s ‘A Matter of Trust,’” said Philip Gibbs, a steel analyst at KeyBanc Capital Markets.

The antagonists took different paths to the current impasse. Burritt, 69, spent 32 years at Caterpillar, rising to chief financial officer before joining U.S. Steel in 2013. He became CEO in 2017. McCall, 72, is a fourth-generation steelworker from Gary, Indiana, who earned an associate’s degree in labor studies while working at the mill.

In recent days, McCall has stepped up his attacks on Burritt, calling him a “basic tyrant” and “greedy,” noting that he would receive more than $72 million in compensation if the merger — or any change in corporate control — is approved. U.S. Steel’s board of directors should fire the CEO for “incompetence,” McCall wrote in a recent update to members.

US Steel declined to comment.

Burritt’s warning earlier this month that if the deal with Nippon Steel fell through, U.S. Steel would “largely abandon its blast furnace operations, putting thousands of union jobs at risk” further incensed the union president.

“It’s so irresponsible, it’s hard to believe he would make such a stupid statement,” McCall said.

But Burritt’s comments seemed to confirm the logic behind the 2021 decision to postpone the Mon Valley modernization. The venerable complex is a group of four integrated plants that produce steel used in cars, appliances and housing.

US Steel’s transformation involves two methods of producing steel.

The traditional method used in the Mon Valley involves feeding iron ore, limestone, and coke into a blast furnace to produce molten iron, which is then turned into steel and then shaped into its final form.

Smaller arc furnaces use scrap as a raw material. Known as mini-mills, they require less energy than blast furnaces, produce less pollution and require less maintenance. As reducing the massive carbon footprint of steelmaking has become a higher priority, U.S. Steel is increasingly embracing the newer approach.

In late 2021, the company decided to invest more than $3 billion in a second EAF in Arkansas, which is expected to begin shipping steel next year. The state-of-the-art facility is a key part of the transformation Burritt has begun to move U.S. Steel from relying on blast furnaces for most of its steel production to a 50-50 split between traditional approaches and mini-mills.

That will help cut financial and environmental costs. But it’s bad news for the 11,000 USW members who work for the company and fear losing their jobs to new plants in the South, where there are no unions.

As U.S. Steel plans to expand its production capacity at an Arkansas mill by 3 million tons, the company closed its blast furnaces in Granite City, Illinois, further unsettling unions.

“The Big River acquisition is transformational. They’re moving from a blast furnace steelmaker focused on cars to a more diversified steelmaker with much lower cost of production in electric arc furnaces,” said Gordon Johnson, an analyst with GLJ Research.

Under the collective bargaining agreement, the union has the right to match any offer for U.S. Steel. When the company put itself up for sale in August 2023, the USW transferred its rights to Cleveland Cliffs, effectively endorsing its bid for the company.

Cleveland Cliffs, the second-largest U.S. steelmaker by annual revenue, operates several blast furnaces, including the largest in North America. Through a pair of major acquisitions, CEO Lourenco Goncalves has transformed the company from an iron ore supplier to a major steelmaker over the past five years.

“He sees value in the iron ore-based steelmaking model. U.S. Steel is clearly moving away from that,” said Gibbs, the KeyBanc analyst. “All this time, Lourenco has had (the union’s) trust. U.S. Steel clearly doesn’t have any trust, and Nippon clearly doesn’t have any trust.”

Goncalves negotiated a new four-year labor contract in 2022, and the USW welcomed the resulting pay increase of more than 20%. “It was clear that the chairman, president and CEO Lourenco Goncalves intended to operate differently than the previous owners,” the USW contract summary reads.

Still, some independent analysts say Nippon Steel offers U.S. Steel its best chance for a successful future. The Japanese company is promising to invest $2.7 billion in U.S. Steel plants, about half of which will go to modernizing blast furnaces in Mon Valley and Gary.

Compared with Cleveland Cliffs, Nippon Steel has a better long-term financial outlook, according to James Gellert, president of RapidRatings, a supply-chain risk analysis firm. Gellert rates companies on 62 financial metrics, ranking them on a 100-point scale. Cleveland Cliffs has a “core health” score of 30 (poor health) compared with 58 (fair health) for Nippon Steel, according to RapidRatings.

“Nippon Steel is a bigger ‘add-on’ to U.S. Steel than Cleveland Cliffs, strictly from a financial health perspective,” Gellert said. “The strongest of the three companies from a long-term perspective is Nippon Steel. The weakest is Cleveland Cliffs.”

Cleveland Cliffs did not respond to a request for comment.

McCall is skeptical about Nippon Steel. Most of the promised investment will cover only annual furnace maintenance and improvements to Mon Valley’s finishing operations, he said. Nippon Steel executives have not given him details about spending plans for the Mon Valley blast furnaces, he said.

The union has opposed the Nippon Steel takeover since it was announced Dec. 18. McCall complained that he was not consulted beforehand, as required by the union’s collective bargaining agreement. Nippon Steel said U.S. Steel management had prohibited him from disclosing the information to the union because it was affiliated with Cleveland Cliffs, a rival bidder.

The Cleveland Cliffs bid also raised antitrust concerns. The combination of Cleveland Cliffs and U.S. Steel would result in a single U.S. steelmaker controlling 100% of the nation’s blast furnace production and 65% to 90% of all steel used in vehicles, according to the Alliance for Automotive Innovation, an industry group.

Cleveland Cliffs’ Goncalves told CNBC this month that he would renew his bid for US Steel if Biden rejects Nippon Steel’s offer, which is likely to happen.

For now, steelmakers and mills can only wait. The CFIUS panel’s final recommendation to the president likely won’t come before the November election.

McCall said he was confident Biden would “deliver” on his commitment.