On a warm September morning in 2014, the 10-man board of Brazilian steelmaker Usiminas met on the ninth floor of a blue glass tower in Sao Paulo.
In the room, the board members grappled over whether to fire the company’s chief executive and two vice presidents after an audit found they’d claimed excessive bonuses.
The battle lines were clearly drawn, according to accounts given to Reuters by several people who attended.
On one side, Japan’s Nippon Steel & Sumitomo Metal Corp, a part of Usiminas since it was founded 60 years ago, insisted the executives had to go.
Rallying to their defense was the company they used to work for, Ternium, a steel producer that is part of closely held Italian-Argentine conglomerate Techint. Ternium had bought into Usiminas in 2012 to get a foothold in the continent’s largest and most protected steel market.
The tense impasse marked a new deterioration of a conflict between the two controlling shareholders that has now left the survival of Brazil’s largest producer of flat steel in doubt.
Brazil’s most tempestuous boardroom feud in years was rooted in a broad clash of corporate cultures and mutual suspicion over supply contracts, according to Reuters interviews with over a dozen former and current employees, including board members and senior executives, as well as union heads and lawyers.
A shareholder meeting this week will decide whether to approve an emergency capital injection of 1 billion reais ($288 million), but analysts question whether it will be enough to save the company.
Usiminas has already closed one of its two main steel mills, slowed work at its mines and laid off thousands of employees, its problems exacerbated by Brazil’s worst recession in decades. Both sides increasingly see breaking up the company as the best way to resolve the dispute.
“It went further than common sense should ever have allowed it to,” one former board member said of the feud.
Most of the employees, executives and other sources spoke on condition of anonymity, fearing disciplinary action or trouble getting new work in the sector.
Nippon Steel, Ternium and Techint declined to comment.
Usiminas, which has a workforce of around 25,000, said its Cubatao mill had been shut temporarily due to low steel demand and that all its supply contracts, including those with shareholders, go through a bid process. It declined to answer further questions.
As the tense September 2014 board meeting dragged into its sixth hour, Chairman Paulo Penido broke the deadlocked vote and the three executives were dismissed.
With his vote, Ternium lost its grip on the running of the company and the fight for control of one of the nation’s most storied steelmakers, previously carried out behind the boardroom door, broke into the open.
Sources say tension was inevitable from the moment Ternium, an outsider with a strong reputation for cost control and productivity, took joint control in 2012.
The company it bought into, formally known as Usinas Siderurgicas de Minas Gerais SA, was founded in the 1950s as a state enterprise producing flat steel principally used in automobiles.
It was an important part of Brazil’s industrialization, but also of Japan’s post-war economic diplomacy as the firm that later became Nippon Steel transferred technology, equipment and steel know-how to Usiminas at a time when few countries opened their doors to the Asian power.
When Usiminas was privatized in 1991, Nippon Steel became one of its largest shareholders. Ternium had to share power with Japan’s largest steel company when it paid $2.7 billion along with sister firm Tenaris for a 27.7 percent voting stake.
That stake came at a hefty 83 percent premium on Usiminas’ share price, reflecting optimism at the time about Brazil’s long-term growth potential and domestic demand for steel.
But as Brazil’s economy slowed, then stagnated, it became clear Ternium, which runs steel mills in Mexico and Argentina, had overpaid. The result was a push to improve productivity with an urgency out of synch with the rest of Usiminas’ ownership, several company sources said.
With Nippon Steel’s initial investments in the company long paid off, it had less appetite for radical change.
“A lot of what Ternium wanted to do needed to be done, but they tried to do it too fast and without building proper consensus,” said a former senior executive who worked closely with the new bosses arriving at the time.
Ternium, formally based in Luxembourg but with principle operations in Argentina, brought in its own executives to push through cuts having identified waste in Usiminas’ swollen workforce. Argentines, including the Chief Executive Julian Eguren, who would later be fired over his bonus, and Mexicans got senior jobs.
The changes, although approved at board level, irked Brazilians as well as the Japanese who had prided themselves on training and promoting locals, according to sources sympathetic to Nippon Steel.
One Brazilian 25-year mining veteran told Reuters he quit because he couldn’t bear his new Ternium boss, who he said swore constantly and forced changes the rest of the management disagreed with. “He was so rude,” he said.
Beyond staffing, Ternium was unhappy with what it saw as a potential conflict of interest in Nippon Steel’s close relationship as supplier to Usiminas.
The equipment, mostly from Japan, was viewed as top notch, but Ternium questioned the price and the timing.
The new management argued a hot strip mill, used to roll and stretch steel, could have been obtained for 30 percent less, according to the former senior executive. It was bought for $1 billion just before Ternium took its stake.
For a while, Ternium’s reforms seemed to work. Between July 2012 and January 2014, Usiminas’ share price jumped 150 percent, as it improved cash generation and reduced leverage.
“There was a lack of humility on both sides, but the Japanese really tried to find a solution. They accepted about 85 percent of Ternium’s proposals,” said another former executive.
The payments uncovered by the audit, however, proved a step too far. Sources sympathetic to Nippon Steel say Ternium refused to back down and accept its executives had broken company laws.
Internal and external audits, conducted by Ernst & Young and Deloitte, showed the bonuses had not been properly approved, though the amounts classed as illegitimate varied.
Sources familiar with Ternium’s position say it argues Nippon Steel used an immaterial breach of process to remove their management and run the company by itself.
From then on, board decisions, which required consensus between the two sides, came to a halt. They could not agree on a new chairman, and Marcelo Gasparino, a candidate representing shareholders outside the controlling block, took the helm in April 2015.
As Brazil’s steel industry entered its worst ever slump. Usiminas’ mills began to lose money and the company turned free cash flow negative.
One afternoon last October in Cubatao, an industrial city an hour’s drive south of Sao Paulo, the mayor’s phone rang.
Shortly after introducing himself for the first time, the Usiminas CEO Romel Erwin de Souza said the city’s steel mill would have to close, according to the mayor’s deputy Fabio Inacio. “We didn’t have time to respond at all,” he said.
By late March, steel production had stopped and over 2,000 people had been laid off. The chimneys were cold and the buses serving the once busy mill ran empty.
At the steel union headquarters in the nearby port city of Santos, dozens of workers queued to settle their redundancy pay.
The union’s president, 57-year-old Florencio Resende de Sa, said his members had been caught in the middle of what he sees as a battle between Argentina and Japan.
“The closure of this plant was the result of a management crisis, not the steel crisis,” he said. He hopes the mill might reopen if Usiminas is split up between Nippon Steel and Ternium.
Under such an agreement, Usiminas’ mill in Ipatinga in southeastern Brazil would remain with Nippon Steel, while Ternium would get Cubatao, sources familiar with the matter say.
Sipping coffee in Rio de Janeiro’s Santos Dumont airport, Chairman Gasparino manages a smile when reminded of an interview he did with Reuters a year ago promising to show victories by now.
“I flew to Japan, I went to Buenos Aires twice. I tried to bring in new management, I tried to improve governance, I brought proposals of interest in buying assets.” But to no avail.
He acknowledged his role over the next 12 months might be to manage the break up of the company.
For Marcelo Peixeira, 44, who worked at Cubatao for 20 years, it’s already too late. Sitting in the suffocating heat of the union building, he looked shocked as he recounted finding out he’d been laid off.
“From one day to the next, it was over,” he said, eyes damp and vacant.