U.S. Steel maps out greater efficiency for 2015
U.S. Steel Corp. achieved $575 million in savings through a cost-cutting and profit-improvement strategy last year that propelled the company into the black for the first time in six years.
The challenge for the company's Carnegie Way Initiative in 2015 will be to remain profitable in an extremely difficult environment in which steel prices are falling, cheaper foreign imports are increasing and weak oil prices are causing energy companies to cut purchases of steel pipes.
“They're going to have to deal with much weaker prices starting next quarter, and we'll see how they manage through that,” said Philip Gibbs, an analyst with KeyBanc Capital Markets in Cleveland. “How they have responded to what's in their control has been pretty impressive.”
U.S. Steel expects to grow its operating profit this year to between $550 million and $850 million, compared with $413 million last year. To do that, the company will have to find more efficiencies through Carnegie Way, in addition to $150 million in savings it expects to realize this year from cuts made in 2014.
The company will realize savings in 2015 from plant closings and a reduction in manufacturing capacity it already announced. CEO Mario Longhi told analysts in a conference call Wednesday that production at eight plants will be curtailed until demand returns.
“Customer order rates will determine the size and duration of any adjustments that we make,” Longhi said.
U.S. Steel had announced the temporary maintenance shutdowns of blast furnaces at Granite City Works in Illinois, Gary Works in Indiana and Fairfield Works in Alabama, the idling of three pipe-making plants in Ohio and Texas, and the shutdown of a tin mill at Gary Works.
Gibbs estimated the production cuts equal about 25 percent of the company's domestic steel-making capacity, which is 22 million tons. Under Longhi's leadership, Gibbs said the company is focused on running efficiently and pursuing only profitable sales, rather than keeping its plants running at all costs.
“They're not going to run the mill to run the mill, and they're not going to sell at a loss,” he said.
Weak demand for U.S. Steel's pipe products from the oil and gas industry is expected to continue through this year, Longhi said. But on the bright side, demand for consumer products such as autos and appliances is expected to grow, he said.
“We're encouraged by the potential that improved consumer spending could provide to our flat-rolled demand,” he said.
The price of crude oil has dropped more than 50 percent since July, causing energy companies to scale back plans for exploration and production. Phoenix-based mining and drilling company Freeport-McMoRan Inc. on Tuesday became the latest firm to cut its 2015 budget, slashing $2 billion mostly from oil and gas drilling projects.
U.S. Steel maintained strong prices for flat-rolled and tubular products in the October-December quarter, which boosted profits, the company said Tuesday. But that isn't expected to last as contracts to supply steel at higher prices expire, said John Tumazos of Tumazos Very Independent Research of Holmdel, N.J.
“The fourth-quarter prices were all better than expected because prices were negotiated earlier in the year,” Tumazos said. “The March (first-quarter) or June (second-quarter) results will probably be significantly less.”
Imports are rising, cutting into U.S. Steel's sales. The American Iron and Steel Institute said this week that steel imports rose 38 percent to 44.3 million tons in 2014.
Despite these challenges, U.S. Steel is in a much better place financially than it was a year ago, Tumazos said. “Had a number of the tough decisions not been made that have been made, U.S. Steel would be doing half a billion to a billion dollars worse, which probably would not be sustainable.”
Alex Nixon is a staff writer for Trib Total Media. He can be reached at 412-320-7928 or email@example.com.