Winter is coming and Stelco Holdings’ steel plant on the Canadian shore of Lake Erie is stocking up for the stormy months ahead. Iron ore from Minnesota and Appalachian coal are streaming off ships on conveyor belts toward the blast furnace and coke ovens. Behind the docks, 25-ton coils of steel are lined up for shipment, still radiating heat three days after they were produced.
After decades of crisis, a renewed sense of purpose has settled over the 107-year-old company, which just completed the first initial public offering of a North American steelmaker in seven years. The question hanging over the reinvigorated enterprise is whether Stelco is finally on the cusp of sustained profitability or whether it will wilt in an industry dominated by global giants and cheap Asian producers.
In the pantheon of great Canadian corporate names, Stelco doesn’t exactly scream confidence. The Hamilton, Ontario-based Steel Co. of Canada was once the country’s biggest producer, with a workforce of 25,000 in the 1970s.
It’s since gone through two stints in creditor protection while it struggled with operating losses, bitter labor relations, high debts and pension deficits. Its most recent owner, U.S. Steel Corp., plucked some of Stelco’s best contracts and abandoned what was left of the company in 2015. Ahead, the winter freeze is the least of its worries as protectionist moves in the U.S. threaten to restrain its ability to expand in North America.
Who would want to take control of such a business?
Meet Alan Kestenbaum, 55, a Brooklyn-born turnaround artist who is now Stelco’s main owner and CEO. Where others see a picked-over carcass, Kestenbaum sees an agile global player. Where some see old facilities and a potentially fractious workforce, Kestenbaum talks up unused capacity, strategic locations and fixable labor relations.
Investors seem willing to give him the benefit of the doubt, for now. Stelco’s stock is up almost 13 percent since the company’s early-November IPO, giving it a market value of about $1.3 billion.
“Stelco represents a compelling investment vehicle within the North American steel sector,” said Bank of Montreal analyst David Gagliano, who initiated coverage with an outperform rating.
Purchased in June, Stelco has major advantages over some of its predecessors and competitors. After about $3.4 billion of debt and pension obligations were eliminated through a restructuring that ended this year, Stelco has a clean balance sheet, along with $179 million of fresh cash raised in the IPO.
What’s more, Kestenbaum has a track record of turning around struggling metal companies at Miami-based Globe Specialty Metals Inc., which he bought for $1 million in 2006. After 11 acquisitions and a merger with Grupo FerroAtlantica, London-based Ferroglobe PLC is now worth about $2.7 billion. Kestenbaum believes he can achieve similar returns at Stelco.
“Two or three more acquisitions down the road and we’ll turn around and we’ll be $6 billion, $7 billion, $8 billion [Canadian dollars], why not?,” Kestenbaum said.
Kestenbaum also has had good labor relations. In fact, it was Leo Gerard, international president of the United Steelworkers union, who suggested Kestenbaum take a look at Stelco. Kestenbaum’s interest was piqued.
A productive labor relationship would be a sea change for Stelco. When it was a subsidiary of Pittsburgh-based U.S. Steel, the company locked out workers three separate times, was sued by the Canadian government for breaking employment promises after the financial crisis and finally shut the Hamilton blast furnace in 2013.
The Kestenbaum era looks like it’s off to a better start. He has already secured a five-year agreement with the remaining 1,650 hourly workers.
Forces beyond Kestenbaum’s control have also been moving in Stelco’s favor. Steel prices have been rising as China, the world’s biggest producer, takes steps to reduce output, while prices for key inputs iron ore and metallurgical coal have declined in the past year.
The near-term picture, though, looks less rosy. The unpredictability of the North American Free Trade Agreement (NAFTA) talks is a risk for Stelco and its ability to win U.S. contracts.
Stelco will have to offer lower prices to compete with U.S. Steel — its former parent company — and other major players, and that won’t be easy without scale, said James May, managing director of Toronto-based price forecaster Steel-Insight. “They’re screwed in a downturn,” when smaller companies will have to discount their price in order to generate sales, May said.
Kestenbaum said his new company is ready for the worst. On the threat of reduced access to the U.S., he points out he is also looking to boost sales to Mexico and Europe, taking advantage of the company’s location on the Great Lakes. And he says he will be more careful than previous owners in preserving a clean balance sheet.
“You don’t take on debt that can only be repaid in optimal market conditions,” he said.