U.S. Steel Shelves Expansion Plans As It Focuses On Controlling Costs

U.S. Steel (NYSE:X) has dropped its plans to expand two of its facilities. The company announced that it will not proceed with the planned expansion to its Minnesota iron ore pellet operations and will not make additional investments at its carbon alloy facilities in Gary, Indiana. ^[1] The company produces a coke substitute product at its carbon alloy facilities at Gary. ^[2] Iron ore and coke are raw materials in the steel making process. The company stated that its current iron ore and coke production facilities are sufficient for meeting its future raw material needs. ((U.S. Steel’s Canadian unit to file for creditor protection, Reuters))

In addition, the company announced that its Canadian unit, U.S. Steel Canada, will apply for bankruptcy protection after posting operating losses for five consecutive years, aggregating $2.4 billion. ^[3] U.S. Steel Canada is seeking a court order that would allow it to operate while exploring restructuring alternatives. U.S. Steel has announced that it would provide its Canadian unit with $168.6 million of secured debtor-in-possession financing (DIP Financing) to support operations through the end of 2015. ((U.S. Steel’s Canadian unit to file for creditor protection, Reuters))

These measures are a continuation of U.S. Steel’s ongoing initiative to operate competitively in a recovering steel demand environment by focusing on cost reduction and enhancing efficiency. The company also announced that it expects its third quarter results to be higher than Wall Street consensus estimates. Current consensus estimates for U.S. Steel’s Q3 2014 performance stand at earnings of 89 cents per share. ((U.S. Steel’s Canadian unit to file for creditor protection, Reuters))

See our complete analysis for U.S. Steel

Steel Demand and Prices

The principal consumers of steel products are the automotive, construction, appliance, machinery, equipment, infrastructure and transportation industries. The nature of business of these sectors is cyclical, with demand generally correlated with macroeconomic conditions. Thus, demand for steel products is generally correlated with macroeconomic fluctuations in the global economy.

Steel prices have fallen over the last few years, driven primarily by weak demand due to adverse macroeconomic conditions in the developed economies and an oversupply situation. This is indicated by trends in the London Metal Exchange (LME) Steel Billet Prices. ^[4] Over the course of last year or so, steel prices have recovered somewhat, driven by an economic recovery in the developed economies, particularly in the manufacturing sector. The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. ^[5] While it has faltered somewhat lately for the Eurozone, it has still remained above 50 for all months in 2014. ^[6]

The realized prices for U.S. Steel’s Flat-rolled Steel segment, which primarily caters to the North American market, rose 7% year-over-year in the second quarter. ^[7] However, realized prices for its European operations as well as for its Tubular Steel segments fell roughly 2% year-over-year. ^[7] Prices of its tubular steel products have fallen due to competition form cheap imports. Thus, though demand has improved, the realized prices present a mixed picture for the company. In such an environment of recovering steel demand and prices, the company is maintaining its focus on controlling costs and improving efficiency.

U.S. Steel’s Response

The expansion of the iron ore-pellet operation would have boosted production by 3.6 million tons a year to 9.6 million tons. ^[3] The decision to drop expansion plans at its facilities in Minnesota and Indiana is a part of the company’s larger plan to control costs. The decision to shelve these expansion plans will save the company roughly $800 million. However, the company will report a pre-tax, non-cash charge of $250 million in the third quarter as a result of these actions. In addition, the company will report another $300-350 million pre-tax, non-cash charge related to its Canadian restructuring. ^[8]

The company management has adopted an initiative known as The Carnegie Way, that is aimed at creating value by enhancing efficiency, reducing costs and boosting profitability. The company provided some details about the areas where The Carnegie Way has benefited its operations during its second quarter earnings conference call. Improvements in manufacturing processes, supply chain and logistics as well as reductions in selling general and administrative expenses are the main areas where the benefits of initiatives undertaken under The Carnegie Way have been realized. ^[9]

Projects undertaken under this  initiative in the second quarter will translate into an improvement in margins to the tune of $145 million in 2014. In addition to the previously announced benefits of $290 million during the first quarter earnings, the total margin improvement as a result of The Carnegie Way will total $435 million for 2014. ^[10] Thus, steps taken by the company are delivering results in terms of margin improvement.

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1. U.S. Steel’s Canadian unit to file for creditor protection, Reuters [↩]
2. U.S. Steel’s 2013 10-K, SEC [↩]
3. U.S. Steel’s Canada Unit to Seek Bankruptcy Protection, Wall Street Journal [↩] [↩]
4. Steel Billet Prices, LME [↩]
5. U.S. Manufacturing PMI, Trading Economics [↩]
6. Euro Area manufacturing PMI, Trading Economics [↩]
7. U.S. Steel’s Q2 2014 10-Q, SEC [↩] [↩]
8. U. S. Steel Announces Strategic Actions To Strengthen Company And Updates Third Quarter Outlook, Yahoo Finance [↩]
9. U.S. Steel’s Q2 2014 Earnings Presentation, U.S. Steel Website [↩]
10. U.S. Steel Q2 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]