U.S. Steel reneged on production, job promises

TORONTO - U.S. Steel violated workforce and production promises it made to Ottawa after it acquired the former Stelco two years ago, but the company says the global recession left it with no choice, according to documents filed with the Federal Court of Canada.

As of May, the workforce at U.S. Steel's (NYSE:X) Canadian operations had shrunk to only 23 per cent of the more than 3,000 workers it promised to employ when it took over Stelco, according to the legal application made by the federal government and obtained by The Canadian Press.

The Pittsburgh-based company also repeatedly broke production promises it made, with the amount of steel produced by its Canadian operations as of May representing "a small fraction" of the amount it was required to produce on an annualized basis, the documents say.

The Canadian government announced Friday it's taking the unprecedented step of suing the American industrial giant to force it to live up to its commitments.

According to the Federal Court application, U.S. Steel made two major promises when it acquired Stelco: that its Canadian steel production between Nov. 1, 2007 and Oct. 31, 2010 would be greater than or equal to 3.95 million tonnes a year, and that it would maintain an average employment level of 3,105 full-time workers at its Canadian operations.

However, the application says that U.S. Steel produced slightly less than the benchmark level in 2008, and that as of May 20, 2009, its Canadian business had "produced a very small quantity of steel, which on an annualized basis, would represent only a small fraction of the amount the Canadian business was required to produce pursuant to the production undertaking."

Hamilton-based U.S. Steel Canada shut down most of its Canadian operations in southern Ontario this spring, affecting about 1,500 employees at mills in Hamilton and Nanticoke, Ont., because of weak markets. In addition, U.S. Steel said 810 workers had retired or were planning to.

As a result, only 23 per cent of the workforce promised in the employment undertaking was actively working for U.S. Steel's Canadian operations as of May 20.

After the shutdowns, Industry Minister Tony Clement sent a letter to the company, asking it to comply with its 2007 commitments.

The court documents say U.S. Steel responded by saying it shouldn't be held responsible for "factors beyond their control" -- namely, the drop in steel demand as a result of the global recession.

Clement said Friday he has carefully reviewed U.S. Steel's response and wasn't satisfied by the company's explanations for non-compliance.

The government is asking for a court order mandating U.S. Steel to meet its promises or face a $10,000 daily fine.

Richard Powers, assistant dean of the University of Toronto's Rotman School of Management and an expert in corporate law, said U.S. Steel made a clear choice to favour its American operations when the recession hit, and as a result its explanation that the economic downturn forced it to close its Canadian operations won't fly.

"They've chosen to keep their U.S. production levels high and cut production in Canada, and it's in clear violation of the agreement that they signed with the government when they took over Stelco," Powers said Monday.

Gregory Somers, an international trade and investment lawyer with Ogilvy Renault, said a contract is a contract, regardless of what happens to the international economy in the meantime.

"U.S. Steel was permitted to invest in Canada on the understanding and with the promise that whether times were tough or not, it wouldn't be the employees of U.S. Steel that had to pay that price, it would be U.S. Steel, for the consideration of being able to invest here," Somers said.

He added that the court can compel U.S. Steel to live up to its promises and, if it refuses, could punish it by "divesting and selling" its Canadian operations to another company.

But Powers said he doesn't expect the dispute will ever make it to court.

"This is just a shot over the bow and it'll get the parties together and they'll work out some kind of an arrangement," he said, adding that a promise by U.S. Steel to increase production at its Canadian mills and hire back those workers on temporary layoff "at some point" will probably be enough to satisfy the government.

Since the initial mill shutdowns, the company has recalled 800 workers to its Hamilton mill who will come back to work over the summer.

Seeking a court order to force a company to maintain job commitments is an unusual step for Ottawa, but it reflects growing unease in the country about the takeover of Canada's steel and mining industries.

Canada's big steelmakers -- the former Stelco, Dofasco, Algoma Steel and Ipsco -- have all been acquired in recent years by foreign companies in a wave of consolidation.

Steel output has taken a beating from the recession, which has hurt demand for everything from vehicles to household appliances. The World Steel Association said Monday global steel output plunged 21.3 per cent in the first six months of 2009 compared to a year ago.