Carnegie Way Changes Having Impact on US Steel

Mario Longhi, President and Chief Executive Officer, announced the implementation of a reliability centered maintenance (RCM) process that is proactive and is expected to reduce maintenance costs over the long term.

“The benefits of an RCM program go beyond just improving the efficiency of maintenance spending. Following a structured program reduces the uncertainty and pressures associated with emergency repairs and reduces the risks to our employees and improves the safety of the working environment,” said Longhi.

US Steel has decided not to proceed with expansion of the Keetac iron ore pallet operations and has terminated the carbon alloy project at Gary Works.

“We’re comfortable with our raw materials capabilities in North America and eliminating the potential spending that would have been required for these projects put us in a better position to pursue other projects including further development of advanced high-strength steels for our automotive customers, to continue to develop premium connections for our Tubular customers, and to invest in our facilities and modernize our operations, including adding electric arc furnace steelmaking into our operating footprint,” said Longhi.

Subsequent to the CCAA filing by US Steel Canada, the subsidy was deconsolidated from US Steel books. A labor agreement was reached with the United Steelworkers Local, Hamilton that will extend until 2017.

In the outlook remarks for fourth quarter, Longhi noted automotive demand was strong but showing a seasonal order rate trend. As a result, US Steel will undertake blast furnace maintenance projects during the fourth quarter, including a reline at Mon Valley Works and maintenance at Granite City and Great Lakes.

In the tubular segment, lower energy prices are not expected to affect US drilling in fourth quarter. Focus will continue to be on horizontal wells. Longhi commented that turmoil in crude oil market may affect drilling activity in the new year.

Flat rolled production in Q4 is expected to be down by 10 percent from the previous quarter. Stronger results are expected in the Tubular and European segments.

During the question and answer period, several topics of interest were discussed.

EAF
: One of the things that probably intrigues me the most is that you’ve mentioned a few times now that you’re looking at more EAF capacity. And I was just wondering if you can maybe expound on that a little bit and kind of talk to us, maybe how far do you see that going? Could this be a company with a footprint that is some day half/half, or where do you see that going?

: Well, I won’t give you a percentage, because we don’t have that clearly defined yet. But I can guarantee you that we’re not going to sit on only one, in the one that we have defined. Analysis of footprint will be coupled to the better understanding that we will have of the markets, the trends, the needs out there and the changing world that we’re in. So these commercial entities that will be created, they will help us capture a much better and profound understanding of how many of those we’re going to need to have. But certainly it’s going to be more than one.

: Just lastly on the EAF investments looking forward, should we think about this as any EAF investment that you make being to replace blast furnace BOF capacity? Or could we see a situation where you actually expand the footprint by adding an EAF operation somewhere? And if that’s the case, where do you think the opportunities could be in terms of that side of the business? Thanks.

: Well, in principle the first line of assessment will lead to a replacement of capacity, Luke. The more that we learn from these new commercial entities, there may be an opportunity for something else. But at this point, it’s mostly capacity replacements, not addition.

: Could you provide an update as to where you stand with the permitting process for the proposed EAF at Fairfield? Are you still aiming to initiate production in 2017? And then also, would you be able to provide an update on your exploration of the viability of DRI production? Are we still in the early innings there, or have you developed a more specific plan that you’d be willing to discuss? Thanks.

: Yes, the EAF plans remains on track and we should be starting in 2017. And you’re also right on the DRI, we’re still in the early stages. There is enough change and nuances to this opportunity that we’re still trying to corral and identify the full viability of that. But progress is also on track, even though it’s early stages.

Polar Vortex
: Hey, guys. In the event of another kind of polar vortex type winter, have you guys got any plans to kind of move more raw materials to your mills? Is there any working capital assessment that we have to sort of adjust to reflect the fact that maybe you’re going to be a little bit more cautious about leaving your mills with all the necessary raw materials before the lakes freeze?

: Very definitely, Brett. Historically over a decade the locks would shut down for an average of 62, 63 days. This past winter they shut down for almost 145 days. And certainly nobody knows whether this is the new norm of what it’s going to be, but we are definitely preparing our operations for a longer period of shutdown of the locks and we are doing it not only by moving more pellets down south, but we’re also increasing our semi product inventory. And all of this will consume an additional level of cash that should help us better prepare us for a tough winter. But it certainly is not going to be for a full 145 days until we know better.

US Steel Canada
: Mario, could you talk about what the next steps are in Canada? Is there a sale process underway from those assets, and would you look to participate that? And in the event that you don’t, would you look at kind of moving away from that asset?

: Well, the process that is in place is to help the USS Canada Board of Directors and the local management to engage in the negotiations necessary for the restructuring. It’s really their call and we have absolutely no influence in how some of those decisions will be made.

Iron Ore
: And then on the iron ore side, in terms of freeing up potential merchant pellet capacity, obviously that would fit in with an EAF strategy as well. Can you just talk about that potential?

: Oh absolutely. One of the things for next year will be a review of efficiencies coming out of the ore range and more detailed and specific exploration plans that should deliver productivity improvements. And according to our base analysis, there might be some opportunities for commercialization of ore and we’re still looking very carefully at the DRI opportunity. So I think that there may be something there and will, should be able to identify it with more specificity going into next year.

: Are you guys still supplying iron ore to the Canadian operations, and how should we think about profits, I suppose, associated with those shipments?

: Yes. We remain a supplier to the Canadian operations, Brian.

: Okay. Is there a way for us to try to fit that? I believe that falls into your other segment. I was wondering if you might be able to guide us in how we might think about the pricing mechanisms and associated margins?

: Actually Brian, that actually is in our Flat-rolled segment, the mining business one. And actually, I mean the way that it stands now, with U.S. Steel Canada being their own entity through deconsolidation, any transactions we have with them will be arm’s length, so they’d be market-based

Imports
: Along those lines I guess, I would just want to revisit the Tubular issue now that you did get some recourse against the Koreans. And maybe it’s too soon, maybe you can comment on this, the volumes are still a little high coming from them. But you certainly did get a nice price response. So are you looking for both price and volume benefits? Are you content with the price benefit? How do you see kind of now looking back at it, how this worked out?

: Well, we certainly would look forward to better benefits from what we accomplished. But I think the fact that imports continue to pour in validates one of the critical points that we addressed in the case. Some of these people have designed our business to attack the United States market. And I think what we’re seeing right now is a validation of that principle.

: Okay. But, and you could pursue further recourse if you decided to then down the road, if it’s onerous? Is that what I am interpreting from your comment?

: Yes.

OCTG
: I was hoping that you could give us a little bit more color on the OCTG business and the potential impact of lower oil prices. And I know it’s probably not the right question to ask a company how bad it can get, but we’re getting that question a lot from people now. And so I was wondering if you guys could walk us through maybe particular product lines that you think might be more affected or not, what contracts you might have in OCTG and whether or not you think any decline in demand that happens in 2015 might affect imports more than domestic. Like how should we think about the moving parts as far as the impact on your business?

: Well, you should keep track of what’s going on very carefully, because it’s volatile. Right now, if you look into the U.S. and North America for example, the number of rigs working for oil and gas, they have increased, and they’re still at a good level. I do not think that the operators will make a knee-jerk reaction on the fact that there has been a significant drop in prices for now. As a matter of fact, many operators still validate new projects on $80 oil. So I think that folks are certainly looking careful at that. The lower prices are going to impact the economy on the other hand positively, so there will be more consumption. People will have more money to spend. And therefore, I think we are at a transitional moment that is going to take a little bit of time for people to sort out exactly where this is going to go.