US Steel’s flat-rolled operations
As discussed previously, US Steel (X) posted a loss in 1Q. US Steel’s flat-rolled operations, the company’s largest segment in revenue terms, posted an earnings before interest, taxes, depreciation, and amortization (or EBITDA) of $37 million in 1Q. This represents a decline of ~90% as compared to 4Q 2014.
Higher unit costs
The per unit production cost increased by almost $100 per ton in US Steel’s flat-rolled operations, as the above chart shows. Raw material costs have declined for steel companies as prices of steel scrap and iron ore have declined sharply. Iron ore prices recently declined to a decade low. Lower iron ore prices negatively impact iron ore companies like Vale (VALE) and Cliffs Natural Resources (CLF). CLF currently forms 2.7% of the SPDR S&P Metals and Mining ETF (XME). Schnitzler Steel (SCHN) forms 1.14% of XME.
US Steel also has iron ore mining operations. The profitability of its mining segment, which is consolidated in its flat-rolled operations, declined as iron ore prices crashed. Moreover, 1Q is typically weak for its mining operations, which negatively impacted the profitability of US Steel’s flat-rolled operations.
Higher fixed costs
US Steel produces all of its steel through traditional blast furnaces, which tend to have a higher fixed cost structure. As US Steel produced less steel in 1Q, the fixed costs were divided among a smaller number of units, driving up the per unit production costs.
US Steel has issued notices under the Worker Adjustment and Retraining Notification (or WARN) Act to almost 40% of its North American workforce. Some of these employees could be laid off in the coming quarters if steel market conditions don’t improve.
As part of prudent financial reporting norms, US Steel has made provisions for these layoff costs in its 1Q earnings. This also had a negative impact on the 1Q profits of its flat-rolled operations.
US Steel’s tubular segment has been under pressure as steel demand from the energy sector has tumbled. In the next part, we’ll analyze the 1Q financial performance of the tubular segment.