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Did U.S. Steel's broken vow save steel price?

Steel operations at the former Stelco Inc. in Hamilton, Ont.

Peter Power/Peter Power/The Globe and Mail

Could a decision by U.S. Steel to shut its Canadian operations actually have benefited the Canadian economy?

In a ground-breaking court case that could define the limits of the Investment Canada Act, U.S. Steel is arguing that its decision to close two Ontario mills acquired as part of its 2007 takeover of Stelco Inc. provided a benefit to Canada because it helped keep steel prices stable during the recession, and allowed two rivals to keep producing.

If U.S. Steel had kept its Canadian mills open, "Dofasco and/or Algoma would have lowered their sales prices in order to preserve their market share in Canada - which would have caused a continued downward spiral in sales prices," according to a report by consultants Ernst & Young that was filed by U.S. Steel as part of its battle with Ottawa over the 2009 shutdown of two Ontario mills.

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Every ton U.S. Steel produced would have meant one less ton sold by Algoma, part of India-based Essar Global, and Dofasco, a unit of Luxembourg-based ArcelorMittal, the report notes.

U.S. Steel is fighting Ottawa's attempt to impose a fine of $10,000 daily for every day it did not maintain employment of 3,105 people and steel production of at least 4.3 million tons annually.

The federal government insists that U.S. Steel's shutdown of the two mills in 2009 violated the promises the company made when Ottawa approved the takeover of Stelco Inc. in 2007.

The fight over the closing is the first court test of the federal government's ability to demand that foreign buyers live up to commitments made under the Investment Canada Act when they acquire Canadian companies.

The battle over the steel mill shutdowns is playing out as Ottawa is facing another big decision on a foreign takeover - the proposed $39-billion (U.S.) buyout of Potash Corp. of Saskatchewan Ltd. by BHP Billiton Ltd. of Australia.

The Saskatchewan government is preparing to ask Ottawa to block the takeover, using the net benefit section of the Investment Act. Prime Minister Harper hinted yesterday that he may be less than receptive, calling Potash Corp. "an American-controlled company."

After U.S. Steel shuttered the two mills in 2009, the economy rebounded and production started again. But while the Lake Erie mill is running again, the Hamilton facility has closed again indefinitely amid a slump in sales.

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The dire straits U.S. Steel faced are outlined in an affidavit filed by John Goodish, the company's executive vice-president and chief operating officer.

"By the spring of 2009, there was a very real concern that U.S. Steel would breach its debt covenants and not have sufficient liquidity to sustain its operations," Mr. Goodish said in the filing.

But the company shut some of its U.S. operations before those in Canada, in part, he insisted, because of the commitments it had made to the federal government and he was worried that shutting the Lake Erie works before a U.S. mill "would be perceived ... improperly as an abandonment of these facilities."

Another expert report submitted to the federal court, written by Robert Crandall of the Brookings Institution in Washington, says it would have cost U.S. Steel $702-million to keep the two Canadian mills operating and instead shut mills in Pennsylvania, Indiana and Alabama.

The Canadian mills have higher costs than the U.S. mills, Mr. Crandall noted, although the actual operating costs per ton are blacked out in the court filing.

Had Stelco remained independent after emerging from protection under the Companies' Creditors Arrangement Act in 2006, it would likely not have survived the recession of 2008-09, he maintained.

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"The major achievement of the U.S. Steel acquisition of Stelco, therefore, is that it has facilitated the long-run survival of the former Stelco's integrated steel facilities."

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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