Are Integrated Operations Adding to U.S. Steel’s Challenges?
Integrated operations have been one of the factors driving the recent performances of steel companies. Iron ore and coal mining fall under steel companies’ upstream operations. In this part of the series, we’ll explore how U.S. Steel’s integrated operations are adding to its dismal performance.
U.S. Steel (X) is largely self-sufficient in the iron ore requirements for its US operations. However, it sources all of its iron ore from third parties in Europe. Europe (VGK) is the only region where U.S. Steel has profited in the last two quarters.
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Falling iron ore prices
It’s important to note that integrated operations are normal for steel companies. ArcelorMittal (MT), Gerdau (GGB), and POSCO (PKX) have different degrees of vertical integration. When raw materials like iron ore and coal are trading higher, the steel companies that produce them through captive mines are at a competitive advantage. However, when the prices of these commodities are lower, as they currently are, vertically integrated steel companies are at a competitive disadvantage.
Read A Comparative Analysis of the Steel Industry to find out about different steel companies’ vertical integration strategy.
Non-integrated players will benefit
Unlike their integrated peers, steel companies that source these raw materials from third parties have been able to bring down their unit production costs. Falling seaborne iron ore prices, as the graph above shows, have helped steel companies that rely on seaborne iron ore bring down their unit production costs.
Another factor that’s driving U.S. Steel lower is its exposure to the energy sector, which we’ll explore more in the next part of this series.