The steelworkers union and U.S. Steel Canada held exploratory talks Monday ahead of planned negotiations on a new contract – with pension costs  looming as the major issue.
The brief meeting at U.S. Steel Canada's Hamilton headquarters aimed to set the broader talks to replace a three-year contract that expires Oct. 15.
"We usually start 90 days ahead of the expiry hoping to get a new deal in place," said Rolf Gerstenberger, president of United Steelworkers Union Local 1005 that represents the former Stelco workers.
Pensions loom as the key issue as the U.S.-owned company seeks to cut its costs of doing business in Canada. The last round of talks in 2011 foundered over demands by the steel producer to replace the current defined benefit pension plan with a cheaper defined contribution scheme to be run by the union and an end to pension indexing for current retirees.
Pension costs have dogged the company for more than a decade and were a key reason it restructured under bankruptcy protection that was finalized in 2006 – when it had 3,500 employees.
Today, U.S. Steel has about 1,600 workers in Ontario – about 600 in Hamilton finishing steel and 1,000 at the blast furnace at Nanticoke on Lake Erie. It shut down its Hamilton blast furnace a year ago and no longer produces steel in the industrial city where it was founded more than a century ago.
Industry analysts say that settling the pension financing dispute is critical to a bigger issue – keeping the company operating in Canada.
Under its 2007 takeover of the former Stelco, U.S. Steel promised Ottawa it would keep its Canadian plants operating only until the end of 2015, and it later agreed to invest $50 million into the business by then.
The company also struck a deal with the the province to finance four pension plans — two each for salaried and unionized staff in Hamilton and Nanticoke.
Both deals expire at the end of 2015 and then minimum funding requirements resume under Ontario's pension legislation.
The company pays about $70 million a year to the four pension plans in an arrangement that's  monitored by the Financial Services Commission of Ontario, a unit of the Ministry of Finance.
"Our plan [alone] needs about $500 million to $600 million to be funded, and in the end, U.S. Steel would rather not pay it," Gerstenberger said in an interview with QP Briefing.
The end of the provincial pension deal next year looms over the company since the four U.S. Steel plans are more than $1.5 billion short of what they need to pay future pensions if the company decides to shut down.
But without a new pension financing arrangement, U.S. Steel would be required under legislation to cover that shortfall over five years.
If the pension funds were shut down, however, the company would transfer that cost to Ontario's Pension Benefits Guarantee Fund, a program that covers some losses retirees would face.
That fund, however, had just under$337.8 million in its 2012 fiscal year — about half of the $667.6 million the year before.
If U.S. Steel opts to shut down in Canada, close out its pension plans and supply its Canadian customers from U.S. mills, Canadian pensioners could lose 40 per cent or more of their benefits.
The pension dispute reflects a growing financial pressures on the steel sector, mainly because of globalization and the weak economics of the old traditional heavy manufacturing business in Canada.
That's compounded by the sale of most of the big players — from Stelco and Dofasco to Algoma Steel and Ipsco — to foreign multinationals in the last decade as part of a global consolidation of the industry.
"When I started 41 years ago, the steel business was a Canadian-owned industry," said Gerstenberger.
"It was one of the few industries that was Canadian owned and we supplied the Canadian market. Now it's almost 99-per-cent foreign owned and you don't even know where the steel is coming from."

Steelworkers, U.S. Steel meet ahead of contract talks

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