U.S. Steel CEO Surma says company studying ways to cut costs

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U.S. Steel chairman and CEO John P. Surma told shareholders the Pittsburgh steel producer is undertaking a thorough study of how to reduce costs and is considering an iron-related joint venture with Republic Steel's plant in Lorain, Ohio.

Mr. Surma made the remarks Tuesday after the company reported a larger than expected first quarter loss on lower sales and shipments.

U.S. Steel said it lost $73 million, or 51 cents per share, vs. a loss of $219 million, or $1.52 per share, in the year-ago quarter. Sales fell 11 percent to $4.6 billion while shipments declined 3 percent to 5.5 million tons. Pricing was flat compared to fourth quarter levels but below prices realized in last year's first quarter.

Operating income, which excludes interest expense and taxes, improved to $38 million vs. $5 million in the fourth quarter and an operating loss of $73 million in the year-ago quarter.

Analysts had expected the steelmaker to report a net loss of about 13 cents per share on sales of $4.66 billion.

Addressing shareholders at the company's headquarters Downtown, Mr. Surma said the cost study is being led by chief operating officer Mario Longhi, who joined the company last year after six years at Brazilian steel producer Gerdau and 23 years at Alcoa.

"The goal is to attack these costs in a very focused and thoughtful way in order to achieve significant, sustainable cost savings," Mr. Surma said.

He said he was not prepared to discuss how much the company is targeting to save. In a conference call with analysts, Mr. Surma said the initiative will "take a pretty big stick to things."

The possible joint venture with Republic would involve direct reduced iron, or DRI, which can be used to replace or supplement scrap in steelmaking furnaces. Analysts say DRI would give U.S. steelmakers a cost advantage because the process relies on low-cost natural gas. The plant would be built at Republic's Lorain mill.

Mr. Surma said the company also is studying whether it would be possible to use iron ore produced at U.S. Steel's Minnesota operations at the DRI plant, if it is built.

Republic recently signed a five-year agreement to provide raw steel that U.S. can convert into tubular products. Republic is owned by Grupo Simec SAB, a Mexican steel producer.

In other remarks, Mr. Surma said the new coke battery at the company's Clairton plant is running at full capacity.

On Sunday, U.S. Steel locked out union workers at Lake Erie Works in Canada after failing to negotiate a labor agreement to replace one that expired April 15. Lake Erie's customers will be taken care of by other U.S. Steel plants "without missing a beat," Mr. Surma told analysts.

At the shareholder meeting, shareholders approved a non-binding resolution to elect the entire board of directors annually. That proposal, backed by the Harvard Shareholder Rights Project, was supported by 82 percent of shareholders, according to a preliminary tally of the vote. The measure is intended to make directors more accountable to shareholders. A similar proposal was backed by U.S. Steel shareholders last year.

U.S. Steel's board opposed the measure. The company had no immediate comment on whether or how it would respond to the vote. Mr. Surma said market conditions in the current quarter for the company's North American sheet business should be comparable to the first quarter. But he forecast the unit will report an second operating loss because of higher operating costs, including higher natural gas prices.

Results for the company's European operations are expected to decline in the second quarter while the tubular business should report results comparable to the first quarter, Mr. Surma said.

Domestic steel producers are suffering from prices that Mr. surma said are as much as $100 lower than year-ago levels. In a note to clients on Monday, Jefferies analyst Luke Folta said falling scrap prices "will likely translate into lower finished steel prices near term." Mr. Folta said industry profit margins will not improve until demand does, something he does not anticipate occurring until the second half of the year at the earliest.

U.S. Steel shares traded lower for much of Tuesday before finishing at $17.80, up 26 cents. They are off 25 percent this year.

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Len Boselovic: lboselovic@post-gazette.com or 412-263-1941. First Published April 30, 2013 9:15 AM


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