U.S. Steel shares jump on turnaround strategy
Shares of U.S. Steel Corp. soared 10 percent Wednesday as the company took some bold steps to help turn around its slumping business but analysts said how quickly it returns to long-term profitability will depend on the success of new technologies for creating steel.
The company cut debt and expenses, some through layoffs and plant closings, while exploring the use of new steelmaking technologies that are seen as cheaper and more efficient. They have announced plans for an electric furnace to melt steel in Alabama.
“It looks like most of the low-hanging fruit has been plucked. Management has been very effective at cutting costs since Mario Longhi took over,” said Andrew Lane, metals analyst with Morningstar in Chicago. “I'm not sure what more they will do to streamline in the short term.”
But he said longer term the company “is likely to enter an investment phase, with projects they have discussed such as electric furnaces that could take years to address.”
The strategic actions taken by U.S. Steel Corp. this week underscore the steelmaker's plan to reduce size to become profitable, the analysts said. Investors cheered the latest news, sending the company's stock up 10.1 percent, or $4.20, to $45.61. The shares have risen 55 percent this year.
U.S. Steel said late Tuesday it is relinquishing control of its money-losing Canadian subsidiary, which applied for court protection from its creditors, and canceled two expansion projects that would have cost more than $800 million to complete. It will not expand iron ore operations in Keewatin, Minn., and it stopped development of plants at its Gary Works in Indiana that made a substitute for coke used in steelmaking.
“These are the boldest steps by U.S. Steel management toward accelerating its transformation into a suitably profitable company,” Goldman Sachs analyst Sal Tharani said. “We believe that the company is truly following its vision of ‘earn the right to grow' — a key pillar of its Carnegie Way project.”
The nation's second-largest steel producer began a review, called the Carnegie Way, in April 2013 and so far has trimmed $435 million in expenses, including the layoff of an undisclosed number of workers in Pittsburgh and elsewhere. It closed tubing plants in McKeesport and Bellville, Texas, affecting 260 workers,
Longhi and other executives were not available for further comment, spokeswoman Courtney Boone said.
“They don't seem to want to tolerate anything that is losing money. It turns out that Canada was losing quite a bit, $25 million a month,” said John Tumazos of Tumazos Very Independent Research of Holmdel, N.J.
“They are saying small is beautiful,” Tumazos said. “They are scrutinizing everything,” and other plants they might sell include U.S. Steel Europe, now consisting only of a plant in Kosice, Slovakia, which must purchase its raw materials at more expensive prices. “Having gotten rid of Serbia and Canada, the headquarters has to become smaller because there isn't as much to manage. And they have been doing that,” said Tumazos. “But they might pause for a while. I don't think they will be killing a major plant every quarter or two.”
Philip Gibbs at KeyBanc Capital Markets said the Canadian decision was “a catalyst for continued and long-term cost improvement in the flat-rolled segment,” U.S. Steel's largest, serving the automotive and appliance markets. Gibbs said the move reduces the company's North American crude steel production capacity to 19.4 million tons from 22 million, which is “largely supportive of the steelmaker's plans to reduce size to become more profitable.”
Pressured to cut costs and improve operations by foreign competition and lower prices, U.S. Steel hasn't turned a profit in five years.
Canceling the iron ore mine expansion “makes good sense in our view in light of the state of iron ore prices and deteriorating fundamentals, and considering that its iron ore consumption will decline when it switches its Fairfield, Ala., blast furnace to an electric arc furnace” that makes steel from scrap, Tharani said.
“Mario Longhi has said we are in the early innings, and we probably are in the early innings because more improvement of the production profile lies ahead,” said Morningstar's Lane.
“The company would explore the construction of multiple electric furnaces,” Lane said. Executives have hinted that other blast furnaces that come up for maintenance could become candidates for a changeover, Lane said. “They are likely to see how Fairfield goes before committing to more,” he said.
“They will need resources to go forward, so I applaud management's progress in cutting costs. I wouldn't expect cost cutting to be as repeatable in the future, but they will continue to cut costs to some degree.”
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or firstname.lastname@example.org.