United States Steel Corporation Continues to Face Production Problems

U.S. Steel to swing back to loss in the second quarter.

May 12, 2014 at 2:21PM

The flat-rolled steel market in the U.S. remains tight as supply disruptions persist at United States Steel Corporation (NYSE:X) and AK Steel (NYSE:AKS). United States Steel, the country's largest steel maker by volume, continues to face production problems at Great Lakes and Gary Works. While Great Lakes Works remains offline as work on a collapsed roof progresses, Gary Works is now running three of four blast furnaces as iron ore availability remains tight. AK Steel, on the other hand, is playing catch-up after an unplanned outage at Ashland.

Blast furnace (BF) producers, including United States Steel and AK Steel, also continue to be affected by the iron ore supply issues due to ice in the Great Lakes. On the other hand, electric arc furnace producers such as Nucor (NYSE:NUE) and Steel Dynamics (NASDAQ:STLD) are not affected by these delivery issues, and are expected to take market share from these BF producers. Strong Nucor volumes in the first quarter suggest this may already be occurring.

Swings to a profit...
United States Steel, America's largest steel producer by volume, returned to a profit in the first quarter, driven by higher commercial prices for its products and Project Carnegie, the company's cost-cutting program. However, adjusted results still missed consensus estimates by significant margins. Higher-than-expected implied operating costs were the main driver for the shortfall, as weather-related issues and logistical challenges on the Great Lakes both affected results during the quarter.

U.S. Steel reported first quarter adjusted EPS of $0.25, missing sell-side estimates of $0.31 by 19%. The headline EPS was adjusted for a $17 million benefit from carbon emission transactions in the company's European segment. Despite the earnings miss, these are impressive results keeping in mind the company's ongoing operational issues and recent updates from peers.

...And swinging back to a loss
Despite impressive first quarter results, the company is expected to swing back to a loss in the second quarter due to outages and logistical issues. The flat-rolled segment is expected to report a loss in the second quarter, as logistical issues and a roof collapse reduce shipments and increase costs.

In early April U.S. Steel halted production at its largest plant, Gary Works in Indiana, as the unusually icy conditions on Lake Michigan delayed raw-material shipments. In a letter to customers the company said the outage is due to "unforeseen and unprecedented ice conditions on the Great Lakes that is [sic] delaying the transportation of critical raw materials."

The closure of Gary Works compounded production issues at U.S. Steel. The company is already dealing with an outage at its Great Lakes site, where the company had to halt production due to a March 27 roof collapse. The Gary Works and Great Lakes facilities account for more than 50% of the company's domestic steel making capacity.

The company said that repairs at the Great Lakes Works should be completed by mid-May with the plant fully operational. However, the actual operating rate will be limited by iron ore availability as transport times on Lake Superior remain extended. Gary Works, on the other hand, is now running three of four blast furnaces as iron ore availability remains tight.

Are savings sustainable?
U.S. Steel indicated that it expects an additional $140 million of profit improvements from Project Carnegie, bringing the total to $290 million from the cost-cutting program. However, it remains unclear how much of these improvements are already flowing through second quarter expectations and how much these improvements will be offset by other issues. Moreover, $290 million equates to only 1.8% of 2013 COGS. Until more evidence emerges in terms of how sustainable these improvements are to operating results, the positive Carnegie effect will start to fade soon.

Takeaway
Production outages are expected to swing U.S. steel back to a loss in the second quarter, thus continuing positive and negative fluctuations in the quarterly results. Since the start of 2009 and continuing to expected second quarter results, U.S. steel has reported 14 negative adjusted results and eight positive adjusted results. This continued volatility in the quarterly results is keeping some long-term investors away from the company.

While the company has the potential to become a consistently profitable business over time, driven by its cost-cutting program, improvements in Tubular and European results, and lower met coal costs, the near-term outlook remains challenging, and it is unlikely the company will post consistent positive results. 

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Jan-e- Alam has no position in any stocks mentioned. The Motley Fool recommends Nucor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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