In two years as president and CEO of U.S. Steel, Mario Longhi has frozen the steel producer’s pension fund; jettisoned its hemorrhaging Canadian unit by putting it into bankruptcy; pulled the plug on steelmaking and most steel finishing operations at its Fairfield, Ala., mill; saved more than $800 million by cancelling a troubled project at its Gary, Ind., mill; and generated about $600 million in annual savings from his vaunted Carnegie Way initiative.
And still the red ink flows.
U.S. Steel is expected to post its third consecutive quarterly loss this week as the fruits of Mr. Longhi’s labor have been overwhelmed by deeply discounted prices spawned by cheap imports, the strong U.S. dollar, an anemic energy market and a global glut of steel.
Analysts are also forecasting the Pittsburgh steel producer will record a loss for all of 2015. If they are right, it will be the sixth time in seven years that U.S. Steel has failed to earn a profit.
“Many things look very bleak,” said John Tumazos, an independent metals analyst from Holmdel, N.J. “Mario has done a lot of what he can do. I think they’ve done a good job not to be in worse shape.”
What ails U.S. Steel and other domestic producers is largely out of their control — China’s huge surplus of steelmaking capacity.
PG graphic: Sliding shares (Click image for larger version)
Mr. Tumazos estimates there may be 700 million or 800 million metric tons of excess steelmaking capacity globally, with China accounting for 500 million to 600 million metric tons of it. By comparison, U.S. mills shipped 98 million tons last year.
“Until China closes a lot of capacity, the world steel situation cannot markedly improve,” said John Anton of IHS, an economics research firm. “If China doesn’t do anything, it doesn’t matter what anybody else does.”
With China’s steel demand expected to drop this year and in 2016, that country is exporting its excess to Europe and the U.S. where steel imports jumped 38 percent last year. Although they are off 5 percent this year, imports still control about 30 percent of the U.S. market.
The surge has left U.S. mills operating at about 70 percent capacity and has driven prices sharply lower. Many steel products cost about $200 a ton less than they did a year ago. Mr. Tumazos said some prices are at levels not seen since the 2003 steel recession, an event that drove several major steel producers into extinction.
Domestic producers have responded by filing complaints against China and other foreign producers, alleging they are dumping three types of widely used sheet products in the U.S. at unfair prices. They also allege some of the imports benefit from government subsidies.
The U.S. International Trade Commission is expected to decide in December and January whether to impose duties on the imports. The higher the duties or margins, the more the sanctions will curb imports.
“If positive results come from these trade cases, it could help the industry out,” said Matt Miller, a metals analysts with S&P Capital IQ.
Mr. Anton said favorable decisions could boost steel prices by as much as $50 a ton, but he believes increases of $25 or $30 a ton are more likely. Rulings in other recent trade cases involving steel imports have not generate the magnitude of relief U.S. producers were looking for, he said.
Carnegie Way loses some sheen
The slump has taken some of the sheen off the Carnegie Way, the centerpiece of Mr. Longhi’s plan for making U.S. Steel capable — as he says — of “earning the right to grow.”
In July, the company said the effort was expected to generate $590 million in savings this year.
Since then, market conditions have deteriorated, prompting U.S. Steel to consider putting 2,000 people out of work by temporarily idling its Granite City, Ill., mill. The plant supplies the company’s tubular business, which is struggling because of the collapse of oil prices. Once U.S. Steel’s most prosperous unit, the tubular business lost $66 million before interest and taxes in the first half. Shipments tumbled 64 percent from year-ago levels.
“I don’t see any scenario where the tube business is good next year,” Mr. Tumazos said.
U.S. Steel laid off salaried personnel in September, but a spokeswoman declined to say how many. Current and former employees who asked not to be identified put the number at about 100. The continuous belt-tightening — much of it spawned by recommendations from outside consultants — has damaged morale, according to the former employees. It’s also jaded opinions of the Carnegie Way.
“In 2014, everybody was buying into it because they were seeing the positive results,” said one former salaried worker who spoke on the condition that she not be identified. “Everybody loved the Carnegie Way then.”
A former operations and maintenance employee who left voluntarily this year called the Carnegie Way “a big joke.” After purchasing officers in Pittsburgh ordered his mill to use cheaper oils to lubricate bearings, the bearings wore out more quickly, resulting in extra costs and longer down time for the mill, he said.
“I’m all about cost cutting, but not at the expense of operations and that’s what we were doing,” he said.
Union negotiations continue
Analysts say the industry’s plight is more than another cyclical swoon. They warn that China, which accounts for half of world steel production, is structurally changing the industry — a fact U.S. producers must come to grips with.
Against this backdrop, U.S. Steel is negotiating a new contract with the United Steelworkers union, which is working under the terms of a labor agreement that expired Sept. 1. Union officials said if the company has its way, the next contract will have their members paying thousands of dollars more each year for health care and agreeing to concessions on overtime, contracting out work to non-union workers and other issues. The union estimates about 17,000 workers are covered by the contract.
Because China’s massive overcapacity augurs tough days ahead for U.S. steel producers, Mr. Tumazos believes the time is ripe for U.S. Steel to win concessions.
“The issue is: how long does the union maintain this illusion that business is temporarily bad,” he said.
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