U.S. Steel’s Cost Reduction Initiatives And Improved Market Conditions Boost Q4 Results

U.S. Steel (NYSE:X) released its fourth quarter results on January 27 and conducted a conference call with analysts the next day. The company’s income from operations rose sharply to $420 million in Q4 2014, from $146 million in the corresponding period in 2013. ^[1] The improvement in U.S. Steel’s results was driven by ‘The Carnegie Way’ initiative, an ongoing company-wide endeavor to reduce operating costs and increase the efficiency of its operations. In addition, improved market conditions for steel in the U.S. boosted the company’s results, partially offset by higher maintenance costs and lower production levels as a result of scheduled maintenance activity.

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The Carnegie Way

With a subdued demand and pricing environment for steel prevailing in 2013, the company had launched an initiative known as ‘The Carnegie Way,’ which is focused on cost reductions and improvements in operational efficiency. The company provided some details about the break-up of areas where The Carnegie Way benefits have been realized. 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. ^[2]

Projects undertaken under this translated into an improvement in margins to the tune of $575 million in 2014. ^[2] In addition, the company estimates that additional benefits of around $150 million will be realized through The Carnegie Way initiative in 2015. ^[2] Thus, The Carnegie Way will continue to positively impact the company’s results this year as well.

Operational Performance

Steel shipments for the Flat-rolled Steel segment stood at 3.02 million tons in Q4 2014, as compared to 3.47 million tons in the corresponding period of 2013. ^[1] This was primarily because of the deconsolidation of the results of U.S. Steel Canada in Q3, after U.S. Steel’s Canadian unit filed for bankruptcy protection. The average realized price for the division rose 2.4% year-over-year to $775 per ton in Q4. ^[1] This was expected, given the improved demand and pricing  environment for steel in the U.S., as compared to the corresponding period a year ago. 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. ^[3] This indicates strong manufacturing activity in the U.S., which is reflected in U.S. Steel’s fourth quarter results. Steel demand in the North American Free Trade Agreement (NAFTA) region, which consists of the U.S., Canada, and Mexico grew by 3.8% in 2014, as compared to a 2.4% fall in demand in 2013. ^[4] Strong price realizations and lower raw materials costs offset the impact of increased repairs and maintenance costs, and boosted the segment’s operating income to $247 million in Q4 2014, significantly higher than the figure of $87 million reported in the corresponding period of 2013. ^[1]

The U.S. Steel Europe (USSE) segment’s shipments rose to 1.11 million tons in Q4 2014, from 1.03 million tons in the corresponding period of 2013. However, realized prices for the segment declined roughly 13% to $600 per ton in Q4 2014. ^[1] The fall in realized prices was largely as a result of a shift in the division’s product mix and lower input prices, particularly iron ore. Iron ore prices fell roughly 40% in Q4 2014, as compared to the corresponding period in 2013, due to a global oversupply situation. ^[5] Despite a fall in realized prices, the segment’s income from operations improved to $34 million in Q4 2014 as compared to $12 million in Q4 2013. ^[1] This was primarily because of lower raw materials costs and benefits from The Carnegie Way initiative.

The results of the Tubular Products segment received a boost from the imposition of anti-dumping duties on the bulk of imported tubular steel products in Q3. ^[6] Competition from imported tubular steels had negatively impacted the division’s realized prices and margins in the preceding quarters of 2014. The Tubular Steel segment’s shipments rose to 448,000 tons in Q4 2014 from 414,000 tons in Q4 2013, as competition from imported tubular steels dissipated. ^[1] The  segment’s average realized price rose 7.7% year-over-year to $1,625 per ton in Q4 2014, as a result of reduced competition from imported tubular steels. ^[1] Higher realized prices and benefits from The Carnegie Way initiative boosted the segment’s income from operations to $121 million in Q4 2014, from $32 million in Q4 2013. ^[1]

Impact of Low Oil Prices on Tubular Products Segment

The recent decline in oil prices has negatively impacted the Tubular Products segment’s prospects. The company’s Tubular Products division produces and sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTGs), standard and line pipe, and mechanical tubing. These goods are primarily sold to customers in the oil, gas, and petrochemical markets. West Texas Intermediate (WTI) crude oil spot prices stood at levels of around $53 per barrel at the end of December, around 50% lower  compared to their values in June of last year. ^[7]

The sharp reduction in oil prices has led to a decline in demand for OCTGs. Accordingly, the company has reduced its planned production volumes for next year. The company announced plans to idle its Lorain and Houston Tubular Products facilities earlier in January. The two plants combined produce around 800,000 tons of tubular steel out of the company’s overall production of around 1.75 million tons. ^[8] In addition, the company recently announced plans to lower production levels at two other facilities, namely its plants in Lone Star, Texas and Fairfield, Alabama. ^[9] Thus, the Tubular Products division’s shipments will fall drastically this year.

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1. U.S. Steel’s Q4 2014 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. U.S. Steel’s Q4 2014 Earnings Presentation, SEC [↩] [↩] [↩]
3. U.S. Manufacturing PMI, Trading Economics [↩]
4. Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association [↩]
5. Iron Ore Spot Price Chart, Y Charts [↩]
6.  U.S. steel pipe makers win key anti-dumping case against cheap imports, Reuters [↩]
7. WTI Crude Oil Spot Prices, Y Charts [↩]
8. U.S. Steel Lays Off 756, Blaming Low Oil Prices, Wall Street Journal [↩]
9. U.S. Steel adjusts production in Alabama, Texas; could affect nearly 2,000 employees, Pittsburgh Business Times [↩]