ArcelorMittal And USW Finally Manage To Strike A Deal

ArcelorMittal (NYSE:MT) and the United Steelworkers union (USW) finally managed to strike a deal and reach a tentative three-year contract agreement, averting a potential strike. The USW and ArcelorMittal had been locked in hard-nosed negotiations for 10 weeks and decided to continue negotiations even after the September 1 deadline, the day the previous agreement expired.

The ArcelorMittal management desisted from ordering a lockout and the USW co-operated by asking its members to continue showing up for work under the terms of the previous agreement instead of resorting to strike. The agreement will now be presented to the USW members for ratification over the next few weeks. The agreement will cover nearly 14,000 workers at 15 ArcelorMittal facilities nationwide. These include flat carbon and long carbon steel production as well as iron ore mining locations. ((Steelworkers reach agreement with ArcelorMittal US, Reuters))

See our full analysis for ArcelorMittal

Terms Of The Deal

The USW and ArcelorMittal did not disclose specifics of the contract terms, but the union said it preserved wages, benefits, seniority protections, and limits on work done by outside contractors. The USW had said that the main points of contention in the contract talks with ArcelorMittal were related to funding for retiree healthcare premiums and pension benefits. According to The Associated Press, the USW won wage increases and improved health care and maintained seniority rights and protections against the use of outside contractors. ((ArcelorMittal and USW reach agreement on labor contract, WTRF.com))

ArcelorMittal had 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 the 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 wanted 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. ArcelorMittal had later backed down from its demand for no pension to future hires ^[1] and now the USW seems to have won a wage increase instead, not to mention retiree healthcare and pension benefits. ((ArcelorMittal Backs Off on Pensions in Talks, Union Says, Bloomberg Businessweek))

Also, ArcelorMittal is believed to have had an upper hand in the negotiation process because its plants in the U.S. represent only a small portion of its overall capacity. The shutdown of ArcelorMittal’s U.S. plants would have done little harm to the company as it has sufficient capacity in Europe and Canada to replace lost production. ^[2] 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, it could have decided to shut down some of its plants in the U.S. This would have resulted in jobless workers, something we thought the USW would be keen to avoid and look to find middle ground during negotiations.

In light of the above, we believe the terms of this agreement represent an unambiguous victory for the USW.

Why We Think ArcelorMittal Backed Down From Its Original Stance

We believe that ArcelorMittal opted to back down from its previous position for one of the two reasons. It may have feared loss of market share if negotiations failed and a strike indeed occurred. It is also possible that the terms set earlier by ArcelorMittal were only a negotiating tactic and all that the company ever wanted was preservation of terms in the previous agreement. If that was indeed the case, we believe the company has been largely successful in not giving any new concessions. At the same time, we cannot help thinking that halting production would have taken out some of the excess capacity in the steel industry and helped to prop up prices a bit.

We recently revised our price estimate for ArcelorMittal from $22 to $18, implying a premium of about 20% to the current market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. ArcelorMittal workers won’t strike for now, Cleveland [↩]
2. USW, U.S. Steel Agree On Tentative 3-year Labor Contract, Nasdaq [↩]