U.S. Steel: Cost-Cutting Helps, But Headwinds Persist

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Source: Thinkstock

Source: Thinkstock

United States Steel Corp (NYSE:X), the largest U.S. producer of steel by volume, is taking a number of actions to cut its costs and to manage macroeconomic headwinds. The company is making strong quantitative savings from raw materials costs, Project Carnegie, and pension tailwinds.

The Pittsburgh-based steelmaker has settled its met coal contracts and is expected to cut its coal/coke cost by $25 per ton, although benefits are not expected to begin showing until 2Q14. The company consumes about 9 million tons of coal and could save about $225 million on an annualized basis. It has further announced $100 million of cost savings related to its cost cutting initiative, Project Carnegie, which brings the total savings to $175 million.

The more important factor is that $150 million out of the projected $175 million will likely be realized in 2014. Although the company did not outline the specifics of the cost reductions, most of these savings are in the flat-rolled division. In addition, the company’s unfunded pension and OPEB expenses are also expected to drop by $105 million in 2014. All these actions are expected to save the company $505 million annually, or about 60 percent of 2013 EBITDA. Finally, the company has indicated that its pension and OPEB underfunded liability will decline by almost 50 percent.

United States Steel’s plan to build an Electric Arc Furnace facility to replace its Fairfield blast furnace is also expected to reduce the company’s cost structure and improve flexibility.

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