United States Steel (X +0.00%) is an iconic name in the steel industry, with a history that dates back to 1901. It wouldn't be an overstatement to say that the company helped to build the America we know today.
However, that history has long been a weight on the company. Management is trying to change that, and 2024 will be an important year in the process.
Old isn't always good
Few companies have the kind of history that U.S. Steel has, but a lot has changed since 1901. One of the more important shifts has been the advent and growth of electric arc mini-mills, an industry development of which U.S. Steel hasn't taken full advantage.
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Essentially, when U.S. Steel was founded, blast furnaces were used to make primary steel. That's still true today, but these mills have historically been rather dirty, environmentally speaking, have high operating costs, and are relatively inflexible. Steel demand tends to ebb and flow with economic activity, so the industry is highly cyclical. Add in the dynamics of blast furnaces, and U.S. Steel's business has, historically speaking, been prone to big peaks and troughs.
By comparison, mini-mills are more flexible. They use scrap steel and are powered by electricity, so they can be ramped up and down more quickly with demand. They tend to be more profitable through the steel cycle than blast furnaces. Weighed down by a heavy focus on older technology, thanks partly to the company's long history, U.S. Steel has seen new competitors like Nucor (NUE +1.91%) take leading positions in the industry it once dominated.
Fixing (part of) the problem
Blast furnaces can't go away because primary steel is still very important. Without primary steel, the supply of scrap steel would eventually dry up. So U.S. Steel isn't looking to get out of the primary steel business. However, it does want to balance this business by adding electric arc mini-mills to its production platform. This is where the Best for All plan comes in, since the company wants to be a top-tier producer in both the blast furnace and mini-mill spaces.
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Key Data Points
The problem with this lofty goal is that building steel mills is a time-consuming and expensive process. For example, the company's new mini-mill is a $3 billion capital investment. That spending won't produce material revenue or cash flow until the plant is up and running, so a lot of money will go out the door with little to show for it.
But that will change in 2024.
During U.S. Steel's first-quarter 2023 earnings conference call, management highlighted that the Big River mini-mill project was on schedule and on budget. That's positive news, but the real story here is what happens when the new plant is actually contributing to financial results: "We expect Big River portfolio will deliver annual through-cycle EBITDA of approximately $1.3 billion, an annual through-cycle free cash flow generation of $1 billion plus by 2026," said CEO Dave Burritt.
We can glean two important things from this.
- First, U.S. Steel's business is about to get bigger, with the mill set to open in 2024.
- Second, given the more consistent through-the-cycle performance of mini-mills, U.S. Steel's business is also about to get less cyclical.
The cyclicality won't end, given the blast furnaces it still operates, but the overall nature of the company will be different than it has been historically. Basically, starting in 2024, U.S. Steel will likely be a more reliable steelmaker.
Time for a second look
For now, most long-term investors looking at the steel sector will probably be better off sticking with a mini-mill operator like Nucor or Steel Dynamics. However, the Big River mill that United States Steel is building could change the company enough that it deserves a second look. That mill won't open until 2024, and then it will need to ramp up over the next couple of years before investors can fully assess its impact on the company.
Still, more aggressive types might want to put U.S. Steel on their watch lists. If there's an industry downturn before Big River is fully up and running, the company's stock will likely be punished more than that of its electric-arc mini-mill peers. And that could lead to an interesting risk/reward equation that might favor U.S. Steel over the mini-mill competition it is increasingly imitating.
