Steel production can be a tough business, and United States Steel (NYSE:X) is doing what's necessary to survive. But the actions it's taking are a bitter pill for the nearly 120-year-old company's employees and shareholders.
U.S. Steel is cutting its quarterly cash dividend from $0.05 per share to $0.01. It also issued a fourth-quarter earnings forecast that was much worse than Wall Street expected. Worse still, the company is laying off more than 1,500 employees as it struggles to cut costs. U.S. Steel's shares sank more than 10% on Friday following the news.
U.S. Steel expects to generate a net loss of $1.15 per share in the fourth quarter. Analysts had anticipated a loss of only $0.62.
Multiple factors are working against the beleaguered steel company. Prices for hot rolled steel futures are down sharply over the past year despite tariffs introduced by the Trump administration in 2018. A slowdown in oil and gas drilling and a strike-related automotive production downturn have taken a toll on steel demand in the United States.
"While the current realities of the markets we serve are having a significant impact on our short-term results, we are taking swift action to align our operational footprint and financial strategy with our customers' future," CEO David Burritt said in a press release. "Fourth-quarter expected results confirm the need to change to make the business more resistant to factors outside of our control."
U.S. Steel is also facing serious long-term challenges. Government-funded steel production in countries such as China has led to capacity overages, which has placed downgrade pressure on steel prices. More efficient competitors such as Nucor (NYSE:NUE), which are able to produce steel at a lower cost, are another major threat.
U.S. Steel is investing in new technologies, such as electric-arc furnaces (EAFs), to better compete with Nucor and other rivals. EAFs can produce steel by melting scrap steel, which is cheaper than producing it from ores in blast furnaces. EAFs also allow for more flexible production, as they can be quickly started and stopped, while blast furnaces can't.
Yet it will take time for these investments to bear fruit. They're also expensive; the electric-arc furnace U.S. Steel is building at its production facility in Alabama is likely to cost at least $280 million. That's part of the reason U.S. Steel is cutting its dividend and shuttering some of its higher-cost operations in Michigan. The company is trying to conserve cash and allocate it to projects that can help it become more competitive.
"While the decisions being made are difficult, we believe they allow us to drive increased stockholder value as we move toward our future faster with a more capital efficient footprint," Burritt said.