OREANDA-NEWS. July 28, 2015. Negotiating a union labor contract is often a slog. It gets more complicated if it’s a multi-year deal, and a bit treacherous if it’s a highly cyclical business.

All three apply to the steel industry, where major producers are in contract negotiations with the United Steelworkers union for long-term deals to replace current ones, which expire September 1. Throw in weak steel demand and high import penetration and it gets even stickier.

Bad times like these put unions at a disadvantage. Mills can legitimately cite market pressures and red ink in arguments for worker concessions. When the market is strong and mill profits are healthy, the steel-toed shoe is on the other foot and the union can reasonably demand its slice of the pie.

Entering the negotiation season, it may be instructive to view the strategy of ArcelorMittal USA, whose CEO has written a number of blogs about the costs of steelmaking, efficiency improvements, collapsed steel prices and import competition.

ArcelorMittal USA recently kicked off talks with the USW, which promptly reported that one of America’s largest steelmakers — if not the largest — is proposing a three-year contract that includes no wage increases and reductions in incentive pay and benefits.

USW said ArcelorMittal USA “cherry-picked parts of other USW contracts from a variety of industries” to form the basis of a pact that also includes a two-tier system of compensation and benefits wherein new hires would receive less. The company also reserved the right to propose more concessions, a USW negotiations update issued last week reported.

ArcelorMittal USA put its own spin on the initial contact talks, saying it “aims to achieve parity with other USW-represented manufacturers in the United States.” The steelmaker noted that it proposes to “close the labor cost gap” with its competitors without reducing wages, “which are among the highest in the industry.”

An ArcelorMittal USA spokesperson said while the steelmaker doesn’t agree with the USW’s characterization of its proposals, it “will not provide further updates at this time on the specific issues being discussed” out of respect for bargaining confidentiality. The spokesperson said the company is committed to working with the USW to reach a fair agreement and said additional information could be gleaned from the Fact Book on the company’s website and recent blogs by ArcelorMittal USA CEO Andy Harshaw.

Harshaw’s blogs say a lot about where ArcelorMittal USA is coming from. He called for the optimization of steelmaking assets, particularly under-utilized hot-strip mills (HSM), the key equipment for making sheet steel, ArcelorMittal USA’s main product. “Why run five HSMs at 70% when you can finish the same tonnage running four HSMs at 90% capacity?” Harshaw proffered.

But when reports surfaced that the company could also rationalize its blast furnace operations and close part of a major mill, Harshaw quickly and adamantly denied it.

Perhaps chatter about more extensive rationalization is understandable given the laundry list of woes facing ArcelorMittal USA and many other American steelmakers. These items were included in Harshaw’s blogs:

  • The company’s average annual wages per USW employee was \\$97,946 in 2014, up from \\$82,473 in 2011.
  • Annual healthcare cost per active employee was \\$18,274 last year, up from \\$15,596 in 2011.
  • Global overcapacity has pushed US capacity utilization to around 70%, while sustained capacity utilization of around 80% is needed for profitability.
  • Imports of flat carbon steel, which account for 93% of ArcelorMittal USA’s business, are up 75% since 2013.
  • Domestic sheet steel pricing has declined by more than 30% since Q1 2014 for a total drop of \\$220/ton. “It’s simple math: that’s a loss in excess of \\$1 billion for 2015 – a loss that we cannot make up.”
  • ArcelorMittal’s US operations require more than \\$1 billion in repair and maintenance costs each year.

Harshaw said ArcelorMittal USA is working closely with the USW to identify ways to achieve higher mill utilization levels and reduce operating costs without giving up market share. “We need to be creative and find solutions to be sustainable,” he said.

The union negotiating committee is now reviewing ArcelorMittal’s proposals and is not likely happy, but given the circumstances, it may have little choice but to make at least some concessions. Still, the union said it is “committed to negotiating a fair agreement that does not include drastic reductions in compensation for active and retired employees.”