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U.S. Steel shrinks, then works to maintain profitability

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U.S. Steel shrinks in size

In the previous part of this series, we discussed U.S. Steel Corporation’s (X) Carnegie Way. One of the first steps U.S. Steel took was to cut down on excess capacity. It halted production at Hamilton, which reduced U.S. Steel’s capacity in North America by around 10%. In February 2014, U.S. Steel idled two tubular facilities in Pennsylvania and Texas. Idling of plants led to a reduction in U.S. Steel’s workforce.

EAF

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U.S. Steel turns to electric arc furnaces

U.S. Steel (X) has primarily made steel through blast furnaces. In January 2014, the company announced it will be replacing its blast furnace in Alabama with an electric arc furnace (or EAF). This is a significant strategic move for a company that has been producing steel through blast furnaces for more than a century.

With this move, U.S. Steel will be able to compete better with competitors like Nucor (NUE) and Steel Dynamics (STLD) that already produce steel through electric arc furnaces. These companies have lower fixed cost structure. Currently, both are part of the Standard and Poors depositary receipt (or SPDR) S&P Metals and Mining exchange-traded fund (or ETF) (XME). The above diagram shows the basic working of an EAF.

Moving to EAFs will help U.S. Steel maintain its long-term profitability. Please be aware that ArcelorMittal (MT) also produces almost two-thirds of its steel through blast furnaces. Read more about ArcelorMittal’s performance.

U.S. Steel has also indicated that it is looking to move to EAFs at some of its other plants. This will be a gradual move for the company.

Moving to EAFs and cutting down on workforce are not the only components of Carnegie Way. U.S. Steel is also driving operational changes that will help the company cut down on costs. We will discuss some of these measures in our next part.

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