Reinventing the Mill

By EDUARDO PORTER
October 22, 2005

James Roberts is understandably bitter about the realignment of America's steel
industry. "It's hardly fair; hardly right," said Mr. Roberts, a 68-year-old
retiree from the Bethlehem Steel plant in Steelton, Pa., who lost his health
care coverage and a third of his pension as the company sank into bankruptcy.

But for Jerry Ernest, a 54-year-old maintenance technician at the former
Bethlehem plant in Sparrows Point, Md., the company's bankruptcy, reorganization
and re-emergence this year as part of the global giant Mittal Steel was not
quite as bad a deal. The money is better; so is the pension. "I'm in my golden
period," Mr. Ernest said. "I'm doing better at this mill than I've ever done."

What was once Bethlehem Steel is more competitive now than it has been in a long
while. Flailing under the onslaught of cheap foreign steel just four years ago,
today it has consolidated into a larger company with a leaner work force and
more pricing power.

To arrive at this stage, however, the work force at Bethlehem's plants was
trimmed to some 8,200, down from 11,500 three years ago. More important,
Bethlehem had to cast off many of its roughly 70,000 retirees.

In doing so, it abandoned the part of industrial America's social contract that
implied that if workers gave the company decades of hot and dirty factory work,
the company would, in return, provide generously for them in old age.

"It doesn't help anybody to have a gold-plated contract in a failing company,"
said Wilbur L. Ross Jr., the financier who bought Bethlehem Steel in 2003,
strung it together with four other bankrupt mills, overhauled their operations
and sold them to Mittal.

"Steel is a cyclical industry, so you need a cost structure with which you can
survive in periods of low demand," Mr. Ross said. "I believe we have achieved
that."

Today, other industrial behemoths like General Motors and Delphi, the giant auto
parts supplier that just filed for bankruptcy, are similarly flailing as they
take aim at the "legacy costs" of retiree health care and pensions. The
gyrations of the steel industry provide a road map of how they might reconfigure
their industrial relations.

The revamping of Delphi in bankruptcy "will put the unions in the difficult
position of perhaps having to make trade-offs between maximizing the pay and
benefits of active workers versus maximizing the chances for saving these
pension plans," Robert S. Miller Jr., Delphi's new chief executive, said in a
meeting with reporters and editors at The New York Times.

Mr. Miller speaks from experience. In 2001, he was the chief executive who led
Bethlehem Steel into bankruptcy.

Just three years ago, most of America's integrated steel mills had either gone
under or were on their way there. On the losing end of a long battle against
cheaper steel made by foreign producers and the low-cost domestic mini-mills,
the giant steel mills around the Great Lakes began shedding large numbers of
workers in the 1970's.

Under relentless pressure, the industry transformed itself. In 1980 steel
companies employed about 400,000 American workers and it took about nine hours
of labor to produce a ton of steel; by last year, the work force had withered to
some 120,000 workers but it took each of them only about two hours to make a ton
of steel.

The surge in productivity also had a cost, however. Early retirement was always
the favored tool to ease workers off the payroll. As layoffs continued from one
decade to the next, the number of retirees grew rapidly. By the end of the
1990's there were about three retirees - drawing pension and health benefits -
for each active worker, nearly triple the ratio for other major basic
manufacturing companies.

Then, the steel industry was hit by a double whammy. Another flood of foreign
steel ate deeply into the market share of domestic producers and steel prices
plunged as demand for the material in Asia and other developing economies
plummeted after the string of financial crises that coursed through the Far
East.

Health care costs were already rising at a rapid clip. But the devastating blow
was delivered by the stock market. When the dot-com bubble burst, it took a big
portion of the assets of corporate America's pension plans with it, leaving them
with billions of dollars worth of unfunded liabilities.

By 2002, the payroll at Bethlehem, the former titan whose steel was used to
build the Golden Gate Bridge, the Empire State Building and the Holland Tunnel,
had fallen to 12,000 workers supporting around 130,000 retirees and dependents.

The company was already sagging under the cost of its retirees' health care
plan, which had dug a hole of $3 billion into the balance sheet. From November
1999 to 2002, the assets of Bethlehem's pension plan shrank to $3.7 billion from
$6.1 billion, according to government filings. The pension plan's obligations,
on the other hand, grew to $6.6 billion.

Bethlehem was among more than 40 steel companies that went bankrupt from 1997 to
last year. Many made it out, mostly overhauled and consolidated into one of
three megacompanies: Mittal, Nucor and U.S. Steel.

While revampings were complex, and involved different combinations of
concessions from their workers, two main components stood out: shedding retiree
medical benefits and unloading the retirement plans onto the government's
Pension Benefit Guaranty Corporation.

Two dozen failing steel companies moved the pension plans for a quarter of a
million workers and retirees to the Pension Benefit Guaranty Corporation from
2001 to 2003, dropping into the government's lap a long-term payment gap of
about $10 billion. The United Steelworkers of America estimated that 208,000
retirees and dependents lost their health care benefits. Bethlehem accounted for
nearly half.

Robert W. Crandall, an economist at the Brookings Institution who is an expert
on industrial organizations, argues that there is a significant parallel between
the troubles afflicting industries like automobiles and airlines and those that
undid big steel: they set the template for their labor relations when they faced
very little competition.

For decades, American car companies and steel mills, facing little competition
from outside the established oligopolies in each industry, were able to provide
generous wages and benefits, raising prices to cover the immediate costs but
deferring much of the impact by promising generous retirement benefits far into
the foggy future.

Unfortunately, those deferred costs started showing up in recent years just as
fierce new competitors emerged - be they Japanese auto transplants, Korean steel
manufacturers or nonunion, scrap-burning mini-mills in the American South and
West.

Take General Motors, which has about 2.5 retirees for every one of its 142,000
active workers in the United States. While the company pension plan is in
relatively good shape, health care is another matter: the company is paying
about $6 billion a year to provide health coverage to its workers and retirees;
the retiree health plan is sinking under $77 billion in projected liabilities
covered by merely $16 billion in assets.

Had G.M., the biggest of the Big Three automakers, managed to keep the 45
percent share of the American car market it had 25 years ago instead of its
present 25 percent, these costs might not have been a problem. But wilting under
the onslaught of more appealing cars made by Toyota, Honda and others, it could
not bear the cost: this week G.M. and the auto workers union agreed to trim
about $1 billion of G.M.'s annual health care expense, mainly by making retirees
pay health care premiums.

What will the overhaul of labor costs do to labor relations at America's big
companies? As the dust lifts on steel's reorganization, the remaining work
force, while radically smaller, does not seem to be in such a bad position. The
International Steel Group, the new company into which Mr. Ross folded his steel
acquisitions, reached an agreement with the steelworkers union that its workers
hail as an improvement over the old.

"The big thing is that people are making more money now than they ever made,"
said Joe Rosel, a maintenance worker and union representative at the former
Bethlehem Steel plant in Sparrows Point. "The companies are making money. That's
a big thing."

Hourly wages will rise $1.39 to $1.90 by September 2008 and bonuses have
increased, too, under a new profit-sharing plan. Bethlehem's byzantine system of
job classifications was also streamlined. Layers of management were eliminated,
giving workers much more autonomy to do their jobs.

Mr. Rosel said that though the company's work force was trimmed by about a
third, everyone who left did so voluntarily under a buyout plan that offered
$50,000 a worker. And though workers remaining on the payroll will lose a chunk
of the pension benefits they had accrued at Bethlehem, union officials say the
new union-managed pension plan is much better than Bethlehem's.

On the other hand, the treatment of retirees has left a bitter taste.

"There's plenty of blame to go around here and none of it is the workers'," said
Mr. Roberts, who retired from the Steelton plant in 2000, after 32 years of
service. "They had no control over what was going on."

Many retirees lost portions of their pensions when the Pension Benefit Guaranty
Corporation took them over, especially the youngest batch. Mr. Roberts, for
instance, lost more than $600 from his $1,875 check - forcing him to get another
job at a school cafeteria last year to supplement his income.

Of the 100,000 Bethlehem retirees and dependents who lost their health care
plan, about a quarter are under 65, too young to qualify for Medicare. While the
International Steel Group agreed to contribute $50 million and a portion of each
year's operating profit to a fund for retiree health care, the pot has only
enough to cover prescription drugs and nothing else.

And it is still uncertain whether the industry can survive over the long term,
even in its current leaner, no-retiree form. Astronomical demand for steel from
China lifted prices sky high last year, providing steel companies with their
best profits in years.

But steel prices have slipped this year. As China and other developing countries
continue building steel plants, workers and executives worry about what would
happen if China's economic growth were to waver and its demand for steel to
wane.

Louis Schorsch, the chief executive of Mittal Steel USA, notes that
labor-management relations are better than they have been in a long time. "The
union has recognized that the old way of doing business doesn't work,"
Mr. Schorsch said. "We shouldn't talk about how to carve the pie but about how
to make this industry more competitive."

The new labor peace is probably a product of the industry's better
fortune. Given its cyclical nature, its fortunes will eventually turn down
again. Then, the new labor relations will undergo their first real test.

And that could bring a fresh quandary to the fore that the industry and the
union may simply be incapable of resolving without outside help from the
government: "Workers who work their whole life," said Leo Gerard, the
steelworker union's president, "should not have to choose between a decent
retirement, a decent paycheck and decent health care."