Can U.S. Steel stage comeback?

Many of its problems are the product of a management that is being replaced wholesale

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Mario Longhi, the former Alcoa executive who will become CEO of U.S. Steel next Sunday, faces a daunting task reenergizing a company beset by a global steel glut, mounting retiree benefit costs and an aging fleet of mills unable to generate profits despite what analysts say should be a significant raw materials advantage.

Some of the problems that the world's 12th-largest steel maker faces also confront its competitors. But others are of its own making, the product of a management team that is being replaced wholesale by outsiders -- a rare event in U.S. Steel's 112-year history.

The executive responsible for those decisions is the man Mr. Longhi is replacing: John P. Surma, 59, president and CEO since 2004. Mr. Surma, who was paid $11.1 million last year, will remain executive chairman of U.S. Steel until retiring from the company and the board of directors at the end of the year. Current chief financial officer Gretchen R. Haggerty and general counsel James D. Garraux are also retiring.

The fact that Mr. Longhi, 59, and the new CFO, former Caterpillar CFO David B. Burritt, are newcomers to the company has raised anxiety among some union officials and uncertainty among investors, who anticipate big changes may be in the works.

PG graphic: CEO performance at U.S. Steel
(Click image for larger version)

Mr. Surma took the job with impressive financial credentials and a reputation for having a sharp mind, a capacity for compassion and a single-minded focus on increasing worker safety. But his number-crunching and people skills were not evident in the results U.S. Steel produced over his tenure. Some blame Mr. Surma's lack of operating and commercial experience.

"He really didn't have the metallurgical background by any means," said analyst Charles Bradford with Bradford Research.

Mr. Surma's legacy includes four consecutive unprofitable years since the onset of the recession; a mounting pension deficit fueled by record low interest rates; a significantly improved safety record; and a stock price that's been cut in half since he became president and CEO.

The hurt is even greater for investors who bought U.S. Steel shares from 2005 to 2008, when a booming Chinese economy sent materials stocks soaring. U.S. Steel shares topped out at $196 in 2008. They closed Friday at $18.67.

"How many CEOs keep their job when the stock's down 90 percent?" Mr. Bradford said.

To some extent, the current stock price reflects a global glut of steel spawned by companies that expanded capacity to meet the demand anticipated from a high-growth China. That country's economy has cooled recently, causing supply to outdistance demand.

U.S. Steel was among those chasing the boom. In 2007, it paid $2 billion for tubular producer Lone Star Technologies and $1.1 billion for Canadian sheet producer Stelco.

While making tubes for the energy market and other customers has been a consistently profitable business, the Canadian operation has been plagued by labor strife.

Union workers at the company's Lake Erie Works in Nanticoke, Ontario, overwhelmingly rejected a contract offer in June, extending a lockout that began April 28. There was an 11-month work stoppage at the Hamilton Works in Hamilton, Ontario, that ended in late 2011. But that mill's blast furnaces have been idle for most of the time since then.

Selling the problematic plants could expose U.S. Steel to risks from any new owners, who could ramp up production and add to the glut of steel.

"They find themselves in a tough position from a macro perspective," said Gordon L. Johnson, an analyst with Axiom Capital Management in New York. "The macro factors aren't in favor of anybody who is at the helm."

Analyst John Tumazos told clients last month that U.S. Steel "may not be able to achieve sustained profitability unless either domestic steel demand increases 10 percent, capacity falls 10 percent or some combination."

Under Mr. Surma, the company has also made some technology investments that analysts question.

They include a new coke plant at the company's Gary (Ind.) Works and a massive software project that is supposed to boost efficiency by allowing the company to make quicker, more informed decisions.

Most companies that have installed the software, known as enterprise resource planning or ERP, found that it cost more and took longer than anticipated and did not produce as big of a benefit as they expected.

U.S. Steel has made limited disclosures about the software initiative, which began in 2007. In April, Mr. Surma said it will cost "multiple hundreds of millions" and won't be completed until 2016. In June, the company announced that senior vice president David H. Lohr, 59, who is in charge of the software project, will retire at the end of the year.

The steel maker's lagging performance confounds analysts who say the company's iron ore mines give it a significant advantage over competitors. Mr. Bradford estimated the benefit at $100 per ton of ore or larger.

Analysts and investors say that advantage is overwhelmed by the higher costs of operating and maintaining its mills -- including higher wage costs than its nonunion competitors -- and pension fund obligations that have mushroomed because of record low interest rates.

At the end of last year, U.S. Steel had $2.7 billion in unfunded pension liabilities versus a $381 million deficit at the end of 2004, the year Mr. Surma took charge.

Mr. Johnson said the pension deficit is one reason why he has a $10 price target on the stock.

"The Street is not factoring in the unfunded pension liability, which is effectively debt," he said.

Mr. Surma, who invested $2 million in 2011 to become a co-owner of the Penguins, also faced outside distractions.

As an active alumna and member of Penn State University's board of trustees, Mr. Surma was the person who told football coach Joe Paterno that he was fired because of a child sexual abuse scandal that engulfed the university in 2011.

University president Graham Spanier, a member of U.S. Steel's board of directors, was also fired from Penn State. Mr. Spanier subsequently left U.S. Steel's board and was charged with a criminal cover-up of former assistant football coach Jerry Sandusky's inappropriate behavior with boys.

Mr. Surma's replacement, Mr. Longhi, joined U.S. Steel last year as chief operating officer after 23 years at Alcoa and six years at Gerdau Ameristeel, where he was CEO until leaving in 2011. This spring, he was promoted to president of U.S. Steel and put in charge of Project Carnegie, a new effort to cut costs and improve efficiency. During a conference call last month, Mr. Longhi told analysts and investors the initiative will focus on four areas: raw materials, the cost of converting those materials to steel, fixed costs and ways to increase revenue.

"Everything is on the table at this point," he said.

In a speech before the Pittsburgh Technology Council on Thursday, Mr. Longhi said the initiative will require the company's more than 37,000 employees "to think differently, think big and to drive change together." The steel producer employs about 5,000 in Western Pennsylvania.

"Our time frame for achieving meaningful results has to be much shorter," he said.

So far, some analysts are not impressed. They wonder why the effort was not made earlier and are upset that the company has not provided a price tag or other details about the initiative.

Workers will find out Mr. Longhi's intentions soon enough.

While analysts expect him to bring a fresh, global perspective, there are doubts about how far he will get at a company that has seldom looked to outsiders for answers.

The excess capacity troubling U.S. Steel and its competitors also raises questions about how much Mr. Longhi will be able to accomplish.

"Even if you brought in Jack Welch or Lee Iacocca, I don't know if you could turn this company around," said one institutional investor who asked not to be identified.


Len Boselovic: or 412-263-1941. First Published August 25, 2013 4:00 AM


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