Something great happened to Alan Kestenbaum on his way to work today. Headed for the Stelco Holdings Inc. offices in Hamilton, Ontario, he struck up a conversation with his Uber driver. The man had a PhD in chemical engineering from his native Pakistan and had been trying to get a job at Stelco. Kestenbaum, a boisterous guy with a slight Brooklyn accent who also happens to be the company’s executive chair, gave the driver his e-mail address. “So I took his resumé. I’m sure by now it’s sitting in the HR department,” he says. “For six years, he’s driving a car!”
Kestenbaum mentions the banal interaction because, for a long time, the outlook for Stelco was bleak. The company was burdened with debt and ultimately languished in creditor protection. Meanwhile, its workforce warred with management. Today, it's a different story. “Everybody wants to work at Stelco,” he says.
Kestenbaum and Stelco CEO David Cheney had worked for the past two and a half years to restore the steel maker—if not completely to its former glory, then at least into a sustainable, profitable business. The two of them, seated next to each other in a Stelco boardroom, are a study in contrasts. Kestenbaum, 57, is a perpetual optimist who delights in bad times. (That’s when he scores his best deals, Stelco included.) He breezes into our interview late, wearing jeans and a Stelco-branded golf shirt. He occasionally speaks in sentence fragments, perhaps to save time. Cheney, 43, meanwhile, looks every bit the former banker he is. He’s dressed in a dark suit, takes notes and is more likely to expound on shareholder returns than offer a personal anecdote.
Their results, however, are hard to dispute. Stelco spent nearly three years under the Companies’ Creditors Arrangement Act (CCAA), which wiped away $3 billion in debt and another $1.4 billion in pension and other obligations. Kestenbaum and his partners purchased the company out of CCAA in June 2017 through a firm called Bedrock Industries Group LLC, took it public a few months later and have churned out a profit in all but two quarters since then. He’s invested millions to upgrade Stelco’s facilities, boosted steel production and weathered the era of punitive U.S. tariffs without lasting damage. Labour relations, which have long been fraught, are the best they’ve been in years. The company is pursuing new clients, fighting to win back old ones and attracting high-profile believers, such as Prem Watsa, the chair and CEO of Fairfax Financial Holdings Ltd., which holds a 14.6% stake. “Stelco may become, in the next four or five years, a very large steel company,” Watsa says. “And very profitable.”
The rest of the market, meanwhile, is skeptical. Stelco's share price has dropped around 36% since its IPO two years ago, and the company is largely dependent on a single, simple product—hot-rolled coil, a type of steel made when a slab is heated to an extremely high temperature, pushed through rollers and cooled down (the finished product is typically used in the construction and building trades). The company is trying to broaden its product offerings, clean its balance sheet to make acquisitions and grow beyond its two main facilities in southern Ontario. Kestenbaum is doing so at a time of heightened political uncertainty (that new Canada-United States-Mexico trade agreement still isn't ratified) and a possible looming recession. None of that seems to worry him when it comes to Stelco, though: “This has to get bigger.”
In 2015, Alan Kestenbaum was looking for a new venture after working for more than a decade assembling a global silicon metal producer. After it merged with a Spanish company in a US$3.1-billion deal, Kestenbaum stuck around a little while but was no longer calling the shots. He began hunting for investment ideas and got in touch with Leo Gerard, then the international president of the United Steelworkers (USW).
Kestenbaum had sought advice from Gerard before, after he purchased a financially troubled ferrosilicon facility in the U.S. “The guys who were running it before were really beating the hell out of the workers,” Gerard recalls. The previous management had forced major concessions; Kestenbaum reversed the damage and restored wages. Gerard had never seen anything like it before—and he had seen a lot. Gerard, who was born in Sudbury, Ontario, is a lifelong union man. He was the Ontario director of the steelworkers' union in the 1990s, when labour unrest roiled Stelco, and became president of the USW in 2001 as globalization gutted manufacturing industries. He'd dealt with steel executives for decades, both good and bad, and wasn't afraid to tell someone who was unreasonable where to stick it. So he clearly had a high opinion of Kestenbaum if he could say, “I think you should look into Stelco.”
Kestenbaum didn’t know much about the company beyond what he read in the news. On the surface, the situation was ugly. Stelco was in creditor protection, and not for the first time. Founded in 1910, Stelco was once a powerhouse, serving as a source of local pride and good wages. At its peak in 1981, the company employed 26,000 people, making it the largest steel maker in Canada. But Stelco fell victim to the same forces plaguing so many other North American steel companies. It was undercut by more nimble and advanced competitors. China flooded markets with cheap steel. Manufacturing moved offshore. Pension liabilities ballooned.
Stelco was put into creditor protection in 2004 and ended up in the hands of private equity firms. Not long afterward, they flipped it to U.S. Steel Corp., headquartered in Pittsburgh, which paid US$1.2 billion in equity and covered another US$785 million in debt. Thus began a dark time for Stelco.
“It was a terrible, terrible, terrible place,” says Randy Graham, president of Local 8782, which represents around 1,110 workers at Stelco's Lake Erie Works facility. The American ownership, Graham charges, saw its Canadian workforce as second-class citizens and imposed a militaristic management style. Feedback was neither encouraged nor welcomed. For a once-proud company, it was demoralizing to be treated as a branch plant.
The union leadership and company executives constantly battled over issues like a random drug-testing regimen. Health and safety procedures caused another rift. Graham says the American company’s training programs were inferior to Stelco’s, and it took an entirely different approach to accidents by meting out discipline. “U.S. Steel’s version was that if someone made a mistake, [you should] punish the guy who made it,” he says.
Graham once attended a training seminar in which a U.S. Steel manager recalled an employee losing a few fingers in an accident. “The safety manager for that facility was quite proud of the fact that once the individual got back to work, he ended up getting a suspension for four or five days,” he says. Graham was appalled.
The situation was similar at the plant in Hamilton. Workers avoided reporting minor accidents for fear of getting disciplined, says Gary Howe, president of Local 1005. “You got a bunch of minor accidents, and all of a sudden you got a serious accident because no one was reporting,” he says. Morale and truancy worsened. “U.S. Steel has long held safety as a core value, dating back to the company’s invention of the term ‘safety first’ over a century ago,” a company spokesperson says, adding U.S. Steel also maintains a hotline for employees to report concerns.
Tensions intensified when the recession hit in 2008. The dire economic conditions gave management leverage to demand steep concessions during contract negotiations, which the union rejected. U.S. Steel repeatedly locked out the workers. Lake Erie employees were shut out for eight months in 2009, followed by their peers in Hamilton for almost a year. It happened again in Lake Erie for four months in 2013.
The company's battles extended to the Canadian government. When U.S. Steel bought Stelco in 2007, it committed to maintaining a certain level of production and employment in Canada. (The exact agreement between the company and government was never made public.) But after U.S. Steel scaled back in the wake of the recession, Ottawa determined the company was not honouring its commitments and took the rare step of launching a lawsuit to enforce penalties in 2009. The two sides ultimately reached a confidential settlement two years later.
Management permanently shut down all steelmaking operations in Hamilton in 2013, and the following year, U.S. Steel placed its Canadian business into creditor protection, claiming cumulative losses of approximately $1.5 billion over its tenure as owner. The company wanted out. The exit confirmed critics’ worst fears. U.S. Steel had hoovered up Stelco’s contracts, allocated production to other facilities and left behind a rusting metal husk. “I truly believe they wanted to run it for everything they could take out of it,” Graham says. “The end game was just to close it up and move on.”
And that created the kind of opportunity Alan Kestenbaum was looking for.
Metal runs in Kestenbaum’s family. He grew up in Brooklyn, New York, where his father worked as a trader at Philipp Brothers. Kestenbaum had a greatuncle, Ralph, another metals trader, who served on the board of the London Metal Exchange. Kestenbaum spent a few summers at Philipp Brothers and studied economics at Yeshiva University. He took a job with Glencore and then moved to Philipp Brothers, but he chafed at the bureaucratic environment. After a year or so, he was fired. He remembers his boss chastising him for his “aggressive” style. “He told me, ‘Look, you’re not going to become CEO of the company in the next six months,’ “ Kestenbaum says. So he became CEO of his own.
Kestenbaum took some seed capital from his father-in-law, Hal Beretz, who had recently stepped down as president and COO of Philipp Brothers, and started his own shop under the name Marco International Inc. in 1985. He shipped aluminum billets out of South America, aluminum coils out of Romania and still more aluminum products out of Russia. Kestenbaum made his way to Asia and opened offices in Beijing, Hong Kong and Tokyo. He took advantage of China’s rapid industrial expansion and travelled to the country several times a year to build relationships and develop customers. “That really catapulted us forward into making a lot of money,” he says.
He started putting some of that money into distressed assets and later formed a new company. (He still has an ownership interest in Marco.) The Asian financial crisis provided ample opportunity to snap up troubled firms on the cheap, and in 2006 Kestenbaum became the owner of a bankrupt company called Globe Metallurgical Inc., which produced silicon in the U.S. The problems at Globe were easy to spot. The company fulfilled orders and then held on to the products until customers actually needed them, and was lax when it came to collecting payments. Kestenbaum put an end to the so-called make-and-hold programs, increased prices and ensured Globe was actually paid. “We turned it around in one year from a loss to a profit,” he says, “and then started buying companies.”
Over the next decade, the company, renamed Globe Specialty Metals, grew to encompass facilities across the U.S., with outposts in Canada, Argentina and South Africa. Globe went public in 2009, offering a return of around 128% before a US$3.1-billion merger in 2015. “In this business, typically, companies overleverage, and then in the downturn, they get hurt and sell assets,” Kestenbaum says. His strategy was to do the opposite: Avoid debt, move fast when times are bad, and always focus on profitability and returns.
Treating workers fairly is part of his ethos too. There’s an anecdote that often comes up when talking about Kestenbaum; it’s one that caught the attention of Leo Gerard at USW. About a decade ago, Kestenbaum bought a silicon plant in Bridgeport, Alabama. He was taken aback by the poverty he saw in the area and shocked when the hedge fund manager selling the plant bragged about slashing the workers’ wages by 30 to 40 cents an hour. “I said to him, ‘That’s dinner for some of these families,’” Kestenbaum recalls. After he bought the plant, Kestenbaum immediately restored wages, which cost an additional $100,000 a year at most.
He’s no stranger to labour disputes, though. After Globe purchased a silicon production facility in Bécancour, Quebec, management demanded steep concessions from the union. When the two sides couldn’t reach an agreement, the company locked out 145 unionized workers. Kestenbaum says there was a larger strategy at play. The wage structure was unsustainable, and China was flooding the market with cheap silicon imports. He wanted to secure the support of Unifor, which represented the workers, and make an anti-dumping complaint. “I remember meeting Jerry Dias and having dinner with him, and within 20 minutes, we basically settled the entire lockout,” he says. The meeting helped them focus on the key issues that were important to both sides. “The rest was just noise.”
A spokesperson for Dias confirmed the meeting took place as described but noted the lockout dragged on for nearly eight months. Though management at the plant kept one of its three furnaces operating, the lockout still cost Globe approximately US$900,000 every month. What ultimately resolved the dispute—without any wage cuts—was the federal government’s introduction of anti-dumping duties on silicon metal from China, which allowed Globe to better compete. Unifor helped lobby for the measures too. Kestenbaum doesn’t have any regrets about the ordeal. “Listen, nobody likes being out of work,” he says, “but as a union, they understood the importance of getting this cost structure down.”
Randy Graham, the Union leader, was skeptical when he first met with Kestenbaum and David Cheney. Here, once again, were Americans with big plans for Stelco. And these two guys didn’t even have a steel background. In one early conversation, Graham says Kestenbaum made a casual comment about idling Stelco’s blast furnace in the event of a downturn, seemingly without realizing the difficulties and costs involved. “That’s truly how green they were,” Graham says. (Kestenbaum does not recall the remark.)
But after that, Kestenbaum and Cheney were quick to impress, asking detailed questions about the business. The union leaders unloaded on U.S. Steel, and Kestenbaum assured them he had never operated that way. “He seemed like a person you could trust,” Graham says. (Bedrock ultimately purchased Stelco for a total of $350 million in June 2017, including payments to U.S. Steel and other creditors. It owns a 46% stake today.)
Kestenbaum had known Cheney professionally for a few years. A former banker with stints at Deutsche Bank and Wells Fargo in New York, Cheney had worked with Globe Specialty Metals. Kestenbaum tapped him to help raise money for Bedrock, and Cheney eventually asked to join full time. “There are some clients that hear what they want to hear, and there are those who really want honesty,” Cheney says. He puts Kestenbaum in the latter category. “It sometimes was advice he didn't want to hear, but he respected it, and so we work well together.”
The pair found a number of things appealing about Stelco. The location was ideal for transporting products, the assets were in good condition, and employees were knowledgeable—though jaded. As he began meeting with workers, Kestenbaum hammered on the fact that he wanted to invest in Stelco again. “They actually liked hearing that there’s a future,” he says. “All of a sudden, people who had been asleep for several years got rebuilt.” At head office, Kestenbaum is a proponent of promoting employees based on merit, not seniority. In traditional industries, there is often an expectation that the most senior person, not necessarily the most qualified, will get the job. Emphasizing talent helps attract a younger workforce and keeps “tension” in the company, he says, encouraging fresh ideas. Stelco has implemented some of those ideas, such as pursuing a co-generation project in Lake Erie that would use excess industrial gas to produce electricity, lowering power costs. Other small gestures have helped too. Earlier this year, when the U.S. government removed tariffs on Canadian-made steel, Kestenbaum issued a $1,000 cheque to every Stelco employee as a bonus for working through a tumultuous time.
Overall, Kestenbaum and Cheney did not have a grand strategy to win over workers. They've been relying on the union reps to be their emissaries and pass along their impressions. Graham, for one, is a convert. “I'm in with a group that's not so much worried about survival now, but about how we become cutting-edge,” he says. Both Kestenbaum and Cheney, despite living in Miami and New York, respectively, are responsive too. Graham still sounds amazed that Cheney swung by to have lunch with him one day. “In all my career, that never happened,” he says. (Graham isn't naive, though. “The first time they screw me over, that'll be different. Phone me then,” he jokes.)
Cheney's approach has been to be as transparent as possible about decisions he's made as CEO. “When you explain to people why you're doing something, they understand,” he says. “They may not agree with it, but there's no concern around hidden agendas.”
But what has really helped improve morale are the investments in the company since emerging from CCAA. About 100 employees have been hired in the past two years, bringing Stelco's head count to approximately 2,250. The research and development division had been whittled down to eight people under U.S. Steel and is now up to 22.
Much of Stelco’s equipment has gotten an upgrade too. The company’s blast furnace in Lake Erie, the main engine for making steel, is roughly 40 years old, and its ceramic lining was starting to degrade. The company shut down the furnace in the fall of 2017 to undertake significant repairs that allow it to churn out more steel, increasing annual capacity from two million to 2.7 million tons.
Kestenbaum initially balked when employees told him the process of modernization, and then marketing the new capacity and increasing production, would take three years. To get it done faster, he exhibited characteristic impatience. “I said, 'You've gotta explain this to me, because Big River Steel was a farm 12 months ago, and now they're making 1.6 million tons,” he says, referring to an upstart American producer. “The next meeting, the guy brought it down to six months, which I said was still too long. The next thing I knew, it was three months. So it's just [about] pushing people.” The sales department was similarly sluggish in its estimation of how long it would take to sell that excess production, so Kestenbaum told them to get more aggressive on pricing. “Within three months—three months!—of expanding capacity, we were fully sold out,” he says. “They told me it was going to take three years.”
Stelco spent another $30 million on a series of new furnaces for its Hamilton facility, which allow the company to pump out fully processed, annealed cold-rolled sheet steel. (Cold rolling, which literally involves running steel through giant rollers multiple times, reduces its thickness. Annealing then heats that steel back up, which allows customers to mould it into the desired shape without it breaking.) Stelco used to produce it more than a decade ago, until U.S. Steel decommissioned the necessary equipment in Hamilton and fulfilled orders at its other plants. Stelco started shipping this kind of steel in June and now has the capability to produce around 200,000 tons each year. It's a very strong product that typically commands higher prices and is used by auto parts and appliance manufacturers, allowing Stelco to serve a broader range of markets.
The company has invested in more than new production facilities. Stelco relied primarily on trucking to transport steel and constantly faced bottlenecks, owing to an industry-wide shortage of qualified drivers. Leasing more rail cars has helped, and so has a major renovation of the port at Stelco’s plant on Lake Erie. The company imports raw materials to the port but had never exported any steel by barge. When Kestenbaum inquired about it, the answer he heard was that things had always been done this way. “You start asking the really dumb questions that haven’t been asked in decades, you get your best answers,” he says. After overhauling the port, Stelco is now shipping steel by barge, opening up markets in the U.S.
The result of all this change is that Stelco is a more diverse company, with a wider product assortment and more options for shipping. That gets at the heart of Kestenbaum and Cheney’s management philosophy, which they call “tactical flexibility.” Steel, of course, is a commodity. Input costs, prices and demand all fluctuate constantly and vary by region. Flexibility allows Stelco to chase profit wherever it can be found. When U.S. President Donald Trump slapped tariffs on Canadian steel and aluminum products in May 2018, Kestenbaum and Cheney flew up to Hamilton to meet with the Stelco sales team and bang out a plan. They identified new potential steel customers in Canada and pursued those clients. “In a tariff environment, we grew shipments 30% in one year. Who does that?” Cheney boasts.
There is still a long way to go. Since taking Stelco public, Kestenbaum has made it a priority to win back automotive customers. In 2006, the vehicle industry accounted for 37% of Stelco’s shipments. Under U.S. Steel, those contracts were moved to other plants. By 2016, auto manufacturers made up just 3% of shipments. (The majority of customers today are pipe and tube manufacturers, and service centres, which buy steel in bulk and resell it to end users.)
Analysts are curious to know how much progress the company is actually making in its diversification efforts. Stelco sells to two auto manufacturers and a few suppliers, but the company hasn't disclosed any more than that. Auto production in North America is projected to be relatively flat over the next five years, according to IHS Markit research, meaning steel producers will have to fight for market share. Stelco has been absent from that battle for years, and existing relationships will be tough to break. Pressed on the challenges involved, Kestenbaum flips the issue around. “That's exactly my point about tactical flexibility,” he says. “If everyone's going to rush into auto, margins are going to shrink. Our approach is we're going to be in auto if the margins are there.”
Still, for all the talk about diversification and flexibility, Stelco remains very much a one-product company—hot-rolled coil. Analysts say the firm's fortunes are tied to the market for that item; that much is evident in Stelco's share price. The company's stock has followed the downward trajectory of hot-rolled coil steel. The price decline is why some analysts have cooled on Stelco. Maxim Sytchev at National Bank Financial downgraded the company to neutral earlier this year. “Stelco is a better asset and better positioned, but it's still the same cyclical business,” he says.
Indeed, downturns are inevitable. That's when the cost-cutting typically begins, when tensions between management and organized labour start to flare and when the halcyon mood around Stelco could be imperilled. Labour contracts are up for renewal in 2022, and what kind of condition the company will be in then is anyone's guess. “The biggest uncertainty I have is what the next growth strategy for Stelco will be,” says Matthew Korn, senior metals analyst at Goldman Sachs.
Indeed, there is a lack of clarity around Stelco's future. In August, Cheney and a group of Stelco workers gathered with Hamilton members of Parliament Filomena Tassi and Bob Bratina in the cavernous Stelco plant to announce a $49.9-million investment through the federal government's Strategic Innovation Fund to support $412 million in upgrades to Stelco facilities and “bring new and innovative products to the North American market,” according to the press release. But the company has not provided any more detail on how exactly the money will be spent and declined to comment further.
Meanwhile, political uncertainty has greatly increased with Donald Trump in the White House, and fears of a recession are rising against the threat of a U.S.-China trade war. “It’s very difficult to make major capital expenditures that are going to take three to five years to roll out with that level of economic uncertainty around,” says Peter Warrian, a senior research fellow with the Munk School of Global Affairs and Public Policy in Toronto. But there’s a more specific risk too. Steel prices soared after Trump slapped tariffs on the metal, and companies in the U.S. poured money into building new production facilities. “There’s a concern that that stuff is going to land somewhere in 2020 or 2021,” Warrian says. “If you have a downturn, you’re going to have all this new capacity coming on.” That would only push down prices even further.
Prem Watsa, for one, is willing to back Kestenbaum through any turbulence. “I'm not concerned at all, for a second, about what he's going to do,” he says. “He's a very shrewd business guy, and he's a contrarian.”
True to form, Kestenbaum’s optimism kicks in at talk of economic trouble. Falling prices? “Well, that’s fantastic,” he says. Stelco isn’t immune to economic headwinds, but it does have some protection: The company has zero debt and about $455 million in cash on its balance sheet. Kestenbaum is seemingly delighted by the prospect of a downturn because other companies will invariably get into trouble and put assets up for sale, and Stelco can purchase them at a decent price. Earlier this year, Kestenbaum handed the CEO title to Cheney, freeing up more time to scout for acquisitions and manage the overall strategy.
He hasn't given any indication of what he's looking for or when he'll find it. But when there's trouble, Kestenbaum says he'll be ready. “That's when we grow the business.”