Having failed in its bid to acquire National Steel Corp., an effort that cost $5 million, industry analysts say AK Steel now has to come up with a strategy to make it as an integrated steel producer with high labor costs, continuing losses and dwindling cash.

Following the recent absorption of National Steel and Bethlehem Steel by larger U.S. rivals, AK Steel is a smaller producer in a consolidating industry that's still plagued by excess capacity even after a wave of bankruptcies. Some analysts say its position is untenable.

"In their current form, there's no way they can survive," said Leo Larkin, an analyst with Standard & Poor's. He thinks the company's only salvation is to substantially lower its labor costs.

Absent a significant change in its union contract, AK might be able to "muddle through" to the end of the year, he said, but its cash situation is getting worse.

In wrangling with the United Steel Workers of America to take over steelmaking operations of National and Bethlehem -- and preserve union jobs -- Pittsburgh-based U.S. Steel Corp. and Cleveland-based International Steel Group both reduced their average labor costs. Meanwhile, AK Steel's union relationship remains strained - largely due to a three-year lockout at its Mansfield, Ohio plant - and its pension obligations are mounting.

Details of the deals struck by U.S. Steel and ISG have not been made public, but both lowered the total compensation they pay to their existing workers and managed to avoid assuming pension and health care obligations to retirees who previously worked at the acquired plants. The end result is that those companies can now make raw steel much cheaper than AK Steel can, analysts said.

AK Steel officials did not return calls for comment.

Chris Olin, an industry analyst with Longbow Research, thinks the likely outcome will be for AK to be acquired by a foreign steel company that wants to enter the giant market for U.S. automobile industry steel. AK sold 60 percent of the 5 million tons it produced in 2002 to the auto industry, including 20 percent to General Motors Corp. alone.

"It's clear that AK Steel cannot go into the future alone," Olin said.

If another company bought AK, it would bring new faces to the table who might be better able to negotiate with the USWA, he said.

Also, if a foreign steel company acquired it, AK could then import steel slabs, which can be made cheaper overseas, and then finish the steel in the United States, where it has excess capacity, Olin said.

Olin thinks AK has a year, probably less, before it's acquired, either by a foreign steel company or by U.S. Steel. The most-likely foreign suitors are Arcelor of France and Brazil's Companhia Siderurgica de Tubarao (CST).

Arcelor, the result of a recent merger of three European steel companies, is the largest steel producer in the world, while CST specializes in semi-finished steel for the auto industry.

Larkin thinks it's more likely that AK will have to remedy its labor costs before an acquirer would be interested.

"AK would not be attractive to anybody if their contracts were not altered substantially," he said. He does not rule out the possibility that someone could make a bid conditioned on a new labor pact.

The other problem hanging over AK is its pension and health care obligations to retirees.

Unfunded pension obligations have ballooned since 2001, when the company took an after-tax charge of $192 million to cover an emerging gap between the value of pension assets and the present value of its future obligations. Last year, that charge soared to $817 million. Even with the stock market recovering in 2003, falling interest rates will tend to increase the gap again this year.

AK's shares meanwhile have been in a steady decline for a year, off more than 50 percent since the end of 2002. The company's market capitalization is less than $400 million at current prices, a value that's dwarfed by $2.7 billion in unfunded pension and health care obligations to retirees.

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