U.S. Steel plans to conserve cash, cut costs further

| Wednesday, Jan. 27, 2016, 11:00 p.m.

U.S. Steel Corp. will be watching every dollar as the Downtown-based steel producer focuses on cutting costs and conserving cash while waiting out a prolonged industry downturn that it is powerless to change.

But after wringing out about $1.4 billion in costs over the past two years through its Carnegie Way improvement program — in addition to the production cuts at mills across the country — some analysts wondered where the company will find more savings.

“The most impactful cost-cutting opportunities have for the most part already been realized,” said Andrew Lane, an analyst with Morningstar Inc. in Chicago. “Any additional cuts are likely to be smaller in scale.”

U.S. Steel said Wednesday it expects to realize another $250 million in Carnegie Way savings this year through efficiency-boosting projects that were started in previous years. It also will preserve $500 million in cash by reducing its inventory, a short-term money-saving measure that involves the company not replacing all of its raw materials as they are consumed.

The company detailed its plans a day after it posted a nearly $1 billion loss in the fourth quarter and provided a pessimistic outlook for the year. Investors dumped the company's stock Wednesday, pushing it down 14 percent, or $1.10, to $6.67 The decline put U.S. Steel among the 10 biggest one-day losers on the New York Stock Exchange. The stock has fallen 76 percent from its 52-week high set in April.

“We do not know how long the industry recession will last, but we know we are managing our business to maintain a strong cash position and to be prepared to respond quickly when the recovery begins,” David Burritt, chief financial officer, told analysts on a conference call.

U.S. Steel ended 2015 with a cash balance of $755 million, which was down from $1.4 billion at the end of the previous year. A strong cash position is an important indicator of a company's financial health but can suffer in difficult times. Companies try to conserve their cash during a downturn so that they have money available to invest in the business when conditions improve.

Capital spending was cut by 30 percent to $350 million for 2016 as the company spends less on work at its mills, several of which are idled. The slump in steel prices, caused in part by a flood of cheap imports and weak demand for pipe from oil and gas drillers, has caused the company to idle or close operations in Alabama, Illinois, Texas and Minnesota and layoff thousands of workers. Steel prices have fallen 28 percent in the last year.

More production cuts are likely this year, predicted Matthew Miller, an analyst with S&P Capital IQ in Denver.

“Management has done what they can to lower costs,” he said. “It's just not enough in this environment.”

U.S. Steel, which has higher costs than many of its competitors, is expected to burn through at least $200 million in cash this year as steel prices and demand remain weak. The company can afford to spend its cash at that rate for a couple years, Miller said, but eventually it could have trouble servicing debt and paying bills. A recovery in steel prices isn't expected for at least a year to 18 months, he said.

“When a company has a couple years of cash burn, it ultimately leads to a situation where it's unsustainable,” he said.

Lane, the Morningstar analyst, said U.S. Steel will have to “keep playing defense in 2016” until the energy industry recovers and steel prices rise.

“Ultimately the key driver of profitability is going to be the price of steel, over which U.S. Steel has no control,” he said. “And volumes of tubular products, which are going to be driven by oil prices, another variable over which management has no control.”

Alex Nixon is a Tribune-Review staff writer. Reach him at 412-320-7928 or anixon@tribweb.com.

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