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.

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. 

You don't want to miss this
The Economist compares this disruptive invention to the steam engine and the printing press. Business Insider says it's "the next trillion dollar industry." And everyone from BMW, to Nike, to the U.S. Air Force is already using it every day. Watch The Motley Fool's shocking video presentation today to discover the garage gadget that's putting an end to the Made In China era... and learn the investing strategy we've used to double our money on these 3 stocks. Click here to watch now!


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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information