U.S. Steel Divests Bankrupt Canadian Operations As Question Marks Persist Over State Of Flat-Rolled Operations

U.S. Steel has finalized an agreement for the sale of U.S. Steel Canada, its Canadian subsidiary which had filed for bankruptcy protection in 2014. ^[1] The high-cost Canadian operations, which reported operating losses for five years in succession before filing for bankruptcy, were acquired by U.S. Steel back in 2007 and reported as part of the U.S. Flat-rolled division. ^[2] The high-cost Canadian operations also suffered from mounting competition from cheap imports, with flat-rolled imported steels accounting for 36% of the Canadian market for flat-rolled steel products in 2014. ^[3] While the impending disposal of U.S. Steel Canada allows the company to divest high-cost operations, question marks still remain over the state of the rest of the company’s U.S. steelmaking facilities.

Question Marks Over State of U.S. Facilities

U.S. Steel stunned investors with an abysmal Q1 earnings result, reporting an operating loss despite favorable market conditions. The company’s U.S. Flat-rolled operations reported a 4% year-over-year decline in shipments in Q1 as the company undertook an overhaul of its facilities in order to improve the reliability and operating performance of its U.S. facilities. ^[4] While it is hard to gauge the extent of the problems at U.S. Steel’s U.S. facilities, the company estimates that the asset revitalization program would take three to four years to be completed. ^[5] Thus, not only the company’s soon-to-be-divested Canadian facilities, but even its U.S. Flat-rolled facilities, which account for close to 70% of the company’s revenue, are blighted by operational problems. Perhaps years of low capital expenditure amid a downturn in steel prices allowed these problems to persist and worsen and now the company is forced to take corrective action. (U.S. Steel’s capital expenditure from 2013-2016 averaged roughly $426 million per annum, around 41% lower than in 2012) ^[6]

As a result of the asset revitalization program, we had lowered our shipment forecast for the Flat-rolled division, with our current forecast representing a 15% reduction by the end of the forecast period, as compared to our expectations before the release of the Q1 results.

Unlike the situation in 2014, when a rising tide of unfairly traded steel imports had overwhelmed the North American steel industry, the business environment is far more conducive for steel producers in 2017. The imposition of antidumping duties on unfairly traded steels by U.S. authorities over the course of 2016 and the ongoing efforts of the Trump administration to provide a level playing field for the domestic steel industry have translated into a recovery in steel prices, as illustrated by the chart shown below.

Given the favorable business conditions, the company is unlikely to be forced to divest inefficient production facilities. However, the completion of the asset revitalization program is essential to ensure that the company is able to benefit from the improved business conditions. We will be watching out for updates regarding the progress of the asset revitalization program from the management in the Q2 earnings conference call, which will be held later this month.

Have more questions about U.S. Steel? See the links below.

• Underperforming Amid Favorable Business Conditions: The Curious Case Of U.S. Steel
• U.S. Steel’s Q1 2017 Earnings Review: Unexpected Decline In Flat-Rolled Shipments Weighs On Results

Notes:

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1. U. S. Steel And Bedrock Industries Finalize Restructuring And Sale Of U. S. Steel Canada, U.S. Steel Press Release [↩]
2. U.S. Steel’s Canada Unit to Seek Bankruptcy Protection, Wall Street Journal [↩]
3. U.S. Steel’s 2014 10-K, SEC [↩]
4. U.S. Steel’s Q1 2017 Earnings Release, SEC [↩]
5. U.S. Steel’s Q1 2017 Q&A, U.S. Steel Website [↩]
6. U.S. Steel’s 2016 10-K, SEC [↩]