U.S. Steel new CEO expected to slash more costs

Market glut could lead to shuttering of at least 1 plant

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The $1.8 billion charge U.S. Steel announced Friday is the first of several moves that industry analysts expect new CEO Mario Longhi will make to revitalize a company that has not had a profitable year since 2008.

Mr. Longhi, who took over Sept. 1 for John P. Surma, has been given a mandate to drastically slash costs and increase efficiency. So far, the former Alcoa executive has been largely silent about how he intends to do that. But analysts expect Mr. Longhi to rip a page from the playbook that most new CEOs rely on by getting the bad news out of the way early in his tenure.

Among the measures analysts expect is shutting at least one of the company's plants. They cite the glut of current capacity as well as new mills being built that are targeting one of U.S. Steel's most profitable markets: tubular products used in the oil and gas industry.

"We remain in a structurally over-supplied market," said analyst Gordon Johnson of Axiom Capital Management in New York City. "Supply is going to continue to grow at an unhealthy clip."

The glut of steel is only one problem Mr. Longhi faces.

The automotive industry, the company's other attractive market, is being courted by aluminum producers. Alcoa is investing $575 million in new equipment to serve auto producers, betting that automakers will rely on aluminum to help meet stricter fuel efficiency standards.

Mr. Longhi also inherited several problems, including an underfunded pension plan, which had a $2.7 billion deficit at year end.

U.S. Steel has had trouble starting up the first of two units at a new coke substitute plant it is building at its flagship Gary, Ind., mill. Indiana environmental regulators said the first unit was idled during August for maintenance. The company would not comment on the maintenance issue but has said it has slowed work on the second module while it makes improvements to the first.

Finally, there's the protracted installation of a massive software project that is costing hundreds of millions of dollars, according to Mr. Surma, who remains executive chairman of the company until he retires at the end of the year. Industry sources said an undetermined number of contractors working on the project have been laid off.

"I think Mario's got a lot to do," said longtime industry analyst Charles Bradford.

On Monday, a U.S. Steel spokesman declined to comment on speculation about plant closings as well as on reports of layoffs at the software project.

Observers say one possibility being considered is shutting down most of U.S. Steel's Fairfield, Ala., mill, which has annual capacity of 2.4 million tons. They said only equipment used to make pipe and tubing for the energy industry would continue operating under that scenario.

Fairfield is surrounded by a host of nonunion, lower cost mills that make similar products.

"It's a miracle in a sense that Fairfield has continued to make sheet steel this long," said John Tumazos, a Holmdel, N.J., analyst. "It's held out a great deal longer than George Armstrong Custer."

Mr. Tumazos said U.S. Steel could idle one or two steelmaking plants, adding that shuttering massive blast furnaces would have "the biggest benefit on the cost structure."

The impairment charge announced Friday illustrates the problems the steel producer faces.

U.S. Steel wrote down the value of its Canadian mills and its Texas tube producing plants by $1.8 billion, the equivalent of $12.39 per share. It will record the charge when it reports third quarter results next week.

The Canadian and Texas operations were acquired in 2007 at a cost of $3.1 billion. The company said the operations are not worth as much as it paid because of the lackluster economic recovery, overcapacity plaguing the industry and the continued high level of tubular imports.

The Texas plants accounted for $800 million of the charge.

"Their pipe problem is a lot bigger problem than that," Mr. Bradford said. He estimated another 3 million tons of steelmaking capacity targeting the energy industry is being built in the United States.

Mr. Tumazos agreed, saying many steel producers bet on the shale gas boom and "ruined [the market] with too much capacity." Part of the problem is that energy producers have been able to extract more oil and gas while reducing the number of rigs they operate, he said.

Investors took the news in stride Monday. U.S. Steel shares rose 3 cents to finish at $24.01.

There were two explanations for the muted reaction by the stock market.

Some said investors already had acknowledged the company had paid too much for the Canadian and Texas plants and had factored the $1.8 billion charge into the price of the stock.

The more common interpretation is that investors are confident Mr. Longhi will be able to right the ship. U.S. Steel shares have jumped 34 percent since he took charge Sept. 1.

Len Boselovic: lboselovic@post-gazette.com or 412-263-1941.

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