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Production cut drives deeper loss at ATI

| Tuesday, July 26, 2016, 9:21 a.m.

U.S. Steel Corp. expects to turn a profit this year as deep cost-cutting combined with lower imports and higher prices are driving a turnaround at the embattled Pittsburgh steelmaker.

The optimistic outlook for 2016 was delivered Tuesday as U.S. Steel reported a smaller loss in the second quarter. The company, which has been hammered by weak demand, low steel prices and a flood of imports, said recent trade-case wins and other market improvements are helping push U.S. Steel closer to profitability.

“Our improving cost structure continues to drive increases in our margins and the recent increases in steel prices started to be reflected in our results,” CEO Mario Longhi wrote in a statement.

U.S. Steel was not the only steel producer Tuesday giving investors a hopeful view on the industry.

West Chester, Ohio-based AK Steel Corp., which owns a mill in Butler, swung to a profit in the second quarter.

Pittsburgh-based Allegheny Technologies Inc. produced a bigger loss but predicted better results as it focuses on higher-margin products for the aerospace industry.

U.S. Steel's shares rose 8 percent Tuesday; AK Steel gained 14 percent; and ATI jumped 19 percent.

U.S. Steel reported its financial results after stock markets closed. In after-market trading, the company's shares were up as much as 6 percent and have nearly tripled in value since the beginning of the year.

Andrew Lane, an analyst at Morningstar Inc. in Chicago, said most domestic producers are reporting improved financial results because imports have subsided and prices have risen.

“For all U.S. steel makers, we've seen a massive increase in steel prices across the industry,” he said.

Steel imports were down 29 percent for the first six months of the year, compared with the same period last year, according to data from the American Iron & Steel Institute, an industry trade group.

Steel producers have been successful in slowing imports through unfair trade cases. The Commerce Department has placed tariffs on hot- and cold-rolled steel from China and other countries this year.

With headwinds easing, U.S. Steel predicted profit of $50 million for 2016, which would be a sizable turnaround after the company lost $1.5 billion last year. The company posted an annual profit in two out of the last eight years.

For the April-June quarter, the company lost $46 million, or 32 cents a share, compared with a loss of $261 million, or $1.79 a share, in the same quarter last year. Analysts had predicted a loss of 43 cents a share.

Sales were $2.6 billion, down 10 percent from $2.9 billion a year earlier.

Meanwhile, ATI said Tuesday that it is shifting from low-margin metals production to more profitable specialty alloys and titanium for the aerospace industry as it reduces production of the commodity stainless steel.

Under the strategy, ATI indefinitely idled two unprofitable plants in Western Pennsylvania, a capacity reduction that contributed to a 39 percent drop in sales from the company's Flat Rolled Products segment in the April-June quarter.

The company now expects to produce about 100,000 tons of commodity stainless steel sheet a year, down from about 250,000 tons in previous years, CEO Richard Harshman told analysts during a conference call to discuss the quarterly results.

At the same time, ATI experienced gains from specialty alloys and titanium parts for the aerospace industry. Those sales rose 6 percent during the quarter, and Harshman said he expects demand to increase further as airplane makers boost production of their next-generation jets.

“ATI is a leading supplier of specialty materials, parts and components (that are) well positioned to benefit from this unique aerospace cycle,” Harshman said on the conference call. “We expect significant profitable growth over the next five years from the new jet engine and air frame programs.”

The closure this spring of a stainless steel finishing plant in Midland and an electrical steel plant in Gilpin were part of a restructuring of the money-losing Flat Rolled Products segment. In addition to the production cuts, ATI laid off a third of the segment's nonunion workers in April and settled a contract dispute with about 2,200 United Steelworkers members after a seven-month lockout.

Also expected to help the segment was the implementation this month of tariffs on stainless steel from China, which Harshman said “should act as a significant deterrent” to cheap imports. The Commerce Department said imports of stainless sheet and strip were unfairly benefitting from Chinese government subsidies and would be hit with duties of 57 percent to 193 percent, depending on the producer.

Those moves are expected to make Flat Rolled Products “modestly profitable” by the October-December quarter this year.

“We were getting much closer to a break-even in that business in June,” Harshman said.

For the quarter, ATI said it recorded a loss of $18.8 million, or 18 cents a share, compared with a loss of $16.4 million, or 15 cents a share, in the same quarter last year. Revenue was $810.5 million, down 19 percent from $1 billion a year earlier.

While the company's loss grew, analysts polled by Bloomberg expected ATI would report a loss of 37 cents a share on revenue of $798 million.

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

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