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Friday, July 27, 2001

By Len Boselovic, Post-Gazette Staff Writer

A last-minute twist in the proposed merger between Canadian National Railway Co. and Wisconsin Central Transportation Co. has pitted U.S. Steel against a former partner.

At stake is how much competition there will be among carriers for the rights to ship the 16.4 million tons of iron ore U.S. Steel produces annually at its Minnesota mine, the largest ore plant in North America.

U.S. Steel initially supported the merger, believing it would increase competition and lower shipping rates. However, Great Lakes Transportation, its former venture partner, opposed it for the same reason, fearing it would lose ore shipments to the merged railroad.

Great Lakes owns railroads, ore boats and docks that move ore from the mines to steel mills. Until four months ago, those operations were part of Transtar, a joint venture between U.S. Steel and the Blackstone Group, a New York investment bank. Blackstone owned 54 percent of Transtar, and U.S. Steel owned 46 percent. The venture was dissolved in March, with Blackstone keeping the ore-related operations and U.S. Steel keeping the Transtar name and railroads that serve other U.S. Steel plants.

Fearing Great Lakes' opposition would derail the merger, the CN offered Great Lakes a tightly crafted, 10-year deal. The settlement covers only shipments of ore by rail that begin on Great Lakes' Duluth, Missabe & Iron Range Railroad that use CN or Wisconsin Central track and that are destined for one of five locations. The destinations include Pittsburgh and Gary, Ind., two cities where U.S. Steel has mills, as well as Lorain, Ohio, where U.S. Steel owns a minority interest in a Republic Technologies mill.

If all those conditions are met, Great Lakes would be the exclusive agent for the CN. Shippers would have to go to Great Lakes for rail rates, and CN agreed not to bid for the business.

After striking the deal, CN and Great Lakes asked the federal government's Surface Transportation Board to make the settlement a condition of Wisconsin Central's merger with CN.

That's when U.S. Steel objected. It called the settlement between CN and Great Lakes "a blatantly anti-competitive arrangement."

Richard M. Efkeman, who oversees raw materials shipments for U.S. Steel, told the federal agency the pact would force it to negotiate with Great Lakes whether it wanted to ship ore over water or by an all-rail route. Great Lakes wouldn't have any incentive to offer competitive rates for the all-rail route, he said.

U.S. Steel argues that since the agreement between CN and Great Lakes targets only certain mines and mills, other ore companies and steelmakers will enjoy more competition from carriers than it will.

At least one other steelmaker is objecting.

AK Steel, which has an interest in an ore mine served by the Duluth, Missabe, says it doesn't want the Surface Transportation Board to bless the settlement between the CN and Great Lakes. The National Industrial Transportation League, which represents U.S. Steel and more than 1,200 other freight shippers, also is objecting to the settlement.

The federal agency is expected to make a decision on the merger by Sept. 7.