U.S. Steel Reports Q1 Loss as it Pursues “Best of Both” Strategy

“The minimill margin profile through this cycle is highly attractive. Their ability to produce cash through the cycle is highly attractive. We need that in the U.S. Steel portfolio,” added Richard Freuhauf, senior vice president and chief strategy and development officer. “And that is why we are going to get it done over the time period we have to do it.”

U.S. Steel still has three and a half years to exercise its option to purchase the remaining share in Big River Steel. To that end, and to navigate the COVID-19 pandemic and deteriorating market conditions, U.S. Steel has taken a number of proactive measures.

Yesterday, the company announced it will temporarily idle the #6 blast furnace at Gary Works and the #1 furnace at Mon Valley works, effective immediately. Iron ore production at Keetac is indefinitely idled following a planned outage in mid-May and coking times have been extended at Clairton works to align with steel production. Minntac operations will also be adjusted to align with steelmaking needs. Great Lakes was successfully and indefinitely idled last month

The company is completing the idling of Lone Star Tubular and Hughes Springs coupling production in Texas. Tubular production will be consolidated at Fairfield Tubular Operations, the site of U.S. Steel’s new EAF that will be completed in the second half of 2020.

The Mon Valley endless casting and rolling project and upgrades to the Gary hot strip mill remain critical, but will be paused for now, executives said. USS will evaluate the pace and timeline for returning to these projects.

U.S. Steel has issued or plans to issue WARN layoff notices for approximately 6,500 employees, but expects the actual number of workers affected to be closer to 2,700. Reductions have also been taken regarding executive leader compensation, merit increases and 401K and retirement matching contributions

Flat roll operations are continuing with the #14 furnace at Gary Works, #3 BF at Mon Valley Works, and the furnace B at Granite City Works. The furnaces will be running at over 80 percent capacity, which will increase production and cost efficiency. U.S. Steel is building slab inventory to prepare for a planned 48-day outage at Gary works that will run from July into August.

A cash saving of $500 million is expected primarily from adjusting the company footprint as well as from cost control and fixed cost reduction measures.

U.S. Steel expects demand to reach bottom in the second quarter and is set to respond quickly as order books fill. Many of the furnaces are “banked” for quick start-up, and there is some inventory build-up from Q1 that will have to be worked through. A production estimate for the year was not provided due to market uncertainty, but U.S. Steel plans to run its assets at the highest utilization rate possible to serve customer needs.

“What we are seeing in the marketplace right now, if you look more broadly, is that the spread between scrap and HRC selling prices is significantly narrowed, which supports our thesis that the market should try to find the bottom here in the second quarter,” said Kevin Lewis, vice president, investor relations.

Automotive production has been shut down due to the coronavirus, but is expected to begin operations gradually in May. Auto production is expected to decline about 19 percent in 2020 compared to last year. About 25 percent of U.S. Steel shipments go into the auto industry.

Construction activity still remains healthy and longer lead times are expected to continue through May. Activity levels are strongest in the South. Packaging volume continues to be strong for canned products.

The COVID-19 impact is exacerbating problems in the oil and gas market. Low oil prices persist and operating rigs are off by 40 percent or more.

U.S. Steel Kosice is currently operating two of its three furnaces and performance has been affected  by business shutdowns and economic weakness in Europe.

Following market closure on Thursday, U.S. Steel announced an agreement to extend its iron pellet contract with Stelco until 2027. Concurrently, Stelco will pay U.S. Steel $100 million for an option to purchase a 25 percent share of the Minntac iron ore operations for $500 million within the next eight years.

“This transaction shows that while we will be nimble and flexible in executing our world-competitive, ‘best of both’ strategy, we will not be deterred,” said Burritt. “In October of last year, we announced our acquisition of our 49.9 percent interest in Big River Steel and our goal of extracting incremental value from our iron ore assets. Today’s announcement demonstrates the continued execution of our strategy and delivers $100 million of incremental cash to the balance sheet in 2020. We are pleased that this transaction validates the competitive advantage of our iron ore mining assets and gives us a path to an additional $500 million of capital to support continued execution of our strategy.”

U.S. Steel results for the first quarter of 2020 included a net loss of $391 million, net sales of $2.75 billion and liquidity of $1.82 billion.

“We see a bottom emerging here in the second quarter; we have modeled a V-shaped recovery, a U, an extended U and even an L,” said Burritt. “It is anybody’s guess as to how this is going to come back and it does seem like people will be cautious at first. But like we saw back in 2008-2009, with the recovery there, we have to be ready for the bull effect. And that is why we have banked those furnaces. We can be nimble, we can be responsive and we can make sure that we continue to make purposeful steps to getting best of both done with our number one strategic priority being Big River.”