Wednesday, March 11, 2015

The United States Steel Corporation: Still Building America

Careful, it's hot

           The United States Steel Corporation as known now has its roots in the mania for conglomeration that existed in the early years of the twentieth century. It was formed in 1901 when Elbert Gary and J. P. Morgan combined their steel holdings with that of Andrew Carnegie. The early company also housed the holding of several other steel companies that it bought out. At its founding, it was the largest enterprise ever by market capitalization ever, valued at 1.4 billion dollars (“History”). Over the course of the company’s history, it has reorganized and diversified. It bought oil companies and their related chemical divisions. Eventually as specialization came into vogue, these were spun off so the company could focus on its core competencies. In 2001, the company split to become two separate companies, U. S. Steel and the Marathon Oil Corporation (“History”). U. S. Steel has also faced competitive pressure over time. Various foreign steel companies have been able to underprice some of the smaller providers in the steel market. These companies have gone into bankruptcy and U. S. Steel has been able to pick up the companies and their related facilities and technologies. These acquisitions have happened in both the United States and abroad (“History”). Through the vicissitudes, U. S. Steel remains a leader in the international steel industry. Today, the company produces sheet steel both hot and cold rolled, coated steel, and tubular products (“Products”). Basically, if it is made of steel, The United States Steel Corporation can make the steel.
            A look the financial statements reveal some difficulty. As of 2013, the last financial statement available, the company had been through five straight years of losses (Annual Report p. 1).  Much of this can be forgiven because these five years have been in the recovery after 2008’s financial crisis, but it is still a bit troubling given that the recession ended in 2009. The company’s main product is a commodity product, and if it cannot control costs, then lower cost suppliers both home and abroad may force them from the market. On one hand, their long history is a selling point. The steel from the United States Steel Corporation can be expected to have the century of knowledge and know how behind it, especially since steel is now all the company does. They have the economies of scale and are far enough down the learning curve to take advantage of this knowledge base. On the other hand, an old company has legacy costs. The factories are aging and the labor agreements in the industrial belt still exist. The workforce is largely unionized, though it has decreased as automation has ramped up.
            The industry itself faces headwinds. The world economy is having troubles with growth in China slowing the fate of that economy is up in the air. This is a huge uncertainty as recently Chinese growth has used almost half of the global steel output (“Outlook”). Other large economies are having their own issues. The European Union has had several countries face recessions during the course of the recovery from the financial crisis, and the United States has not bounced back as quickly as some would have hoped. The global uncertainty means that analysts are predicting a muted 2% growth in the global industry in 2015 (“Outlook”). Periods of uncertainty are nothing new to the United States Steel Corporation, they have gone through the ups and downs of the last 114 years and they are still intact.
            In 2014, Mario Longhi, president of the United States Steel Corporation, laid out his plans to recover competitiveness and take the parenthesis off of the net income line. In his letter to shareholders in the 2013 annual report, Longhi emphasized improving safety, introducing more focus on the Six Sigma manufacturing process, new labor agreements, shutting down the oldest plant in the company, and investment in new efficient manufacturing equipment (Annual Report p. 3.-5).  All of these are efforts to cut costs that are integral to success in what is a narrow-margin commodity business. One final strategy Longhi is perusing is to try to close out the American market through reliance on trade agreements. Because of the thought that the American market is so open, many foreign suppliers have been accused of selling steel to the American market below cost. Such a move, called “dumping” is not allowed through free trade agreements or for members of the World Trade Organization. By both cutting costs and making sure others are playing by the rules, the United States Steel Corporation hopes to extend its history into the next hundred years.
            A preliminary look at the most recent quarterly earnings shows that there may be some life in the company and the turnaround strategy is working. For the year ending December 31, 2014, U. S. Steel was able to claim a net income of $102 million against an almost $2 billion loss in 2013 (“Earnings”). Some analysts are skeptical that the company can maintain this growth, since the declining oil prices have decimated the oilfield services. These companies are large business customers of steel, since they rely on the tubular products that companies like U. S. Steel make. However, this is one point where the recently rising oil prices may have an unseen benefit: it keeps the steel companies in business.


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            York: Wiley.

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