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U.S. Steel Canada plant near Nanticoke, Ontario. The steelworkers union, which represents employees at the company’s mills in Hamilton and Nanticoke, Ont., has said it will seek an injunction to stop the shift of production to the U.S.

Fred Lum/The Globe and Mail

The dispute between United States Steel Corp. and its stakeholders over the future of U.S. Steel Canada Inc., has been sent to mediation by the Ontario Superior Court judge overseeing the Canadian unit's restructuring.

The issues in dispute between the United Steelworkers union, the Ontario government, salaried active and retired employees, and a former president of its predecessor company Stelco Inc. on one side and U.S. Steel on the other, will be examined by former Ontario Superior Court associate chief justice Douglas Cunningham in a three-day session scheduled to begin next week.

"The mediation shall address the feasibility of a comprehensive agreement among the parties," Justice Herman Wilton-Siegel said in an order. The mediation will also address a business plan for the Canadian unit, its potential sale, the shift of production of high value-added steel to the United States and U.S. Steel's claim of more than $2-billion against the Canadian unit.

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U.S. Steel Canada has been operating under the Companies' Creditors Arrangement Act since last September, but the announcement by its parent company that it plans to shift production of about 180,000 tons of high-quality steel annually out of its Canadian operations has sparked an imminent crisis in the restructuring.

"I think we're at the brink here," one source familiar with the process said Wednesday after lawyers involved in the restructuring held a closed-door session with Justice Wilton-Siegel. The steelworkers union, which represents employees at the company's mills in Hamilton and Nanticoke, Ont., has said it will seek an injunction to stop the shift of production of automotive-grade steel to U.S. mills operated by the Pittsburgh-based giant.

Shifting production would diminish the value of the Canadian assets in the eyes of potential buyers, steel industry sources said. U.S. Steel has started a sales process that has led to a bid by one competitor – Essar Steel Algoma Inc., which is based in Sault Ste. Marie, Ont., but has the backing of a deep-pocketed parent company in India.

Potential buyers also need to wonder whether other steel-making contracts will be shifted out of Canada, leaving the Canadian operations to depend entirely on the spot steel market.

Stakeholders have questioned whether U.S. Steel actually wants to sell U.S. Steel Canada – it has also bid for the assets – or use the restructuring process to avoid a pension liability of more than $800-million and an unknown environmental liability at the Hamilton site, where steel has been made for more than 100 years.

"The worst-case scenario is that they want to mothball everything, pick up the pieces and leave and not have any liability," said one source.

U.S. Steel bought Stelco Inc. in 2007. Stelco had undergone a two-year CCAA process that led to its purchase by a group of investment funds.

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But U.S. Steel's history in Canada has been one of confrontation. The company locked out unionized workers in Hamilton and Nanticoke, Ont., during three of four sets of contract negotiations and broke commitments made to the federal government when Ottawa approved the purchase of Stelco under the Investment Canada Act.

U.S. Steel said it was forced to halt steel production in Canada because of the recession, but the broken promises led to the first prosecution of a company under the Investment Canada Act.

That legal dispute was eventually settled, but U.S. Steel and the federal government have refused to release details of the settlement and Judge Wilton-Siegel denied requests by the union and other stakeholders that the agreement be made public.

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