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Why 2016 Could Be the Reality Test for U.S. Steel’s Carnegie Way

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Carnegie Way

U.S. Steel Corporation (X) is running a transformation strategy called Carnegie Way. Through a disciplined approach, it’s working to strengthen its balance sheet by focusing on cash flows, improving its operational efficiency, optimizing its supply chain, and right-sizing its operations.

According to U.S. Steel, Carnegie Way is “much more than a cost cutting initiative.” The company claims to have achieved “sustainable cost improvements” under the program. U.S. Steel expects to better compete with minimills such as Nucor (NUE) and Steel Dynamics (STLD). With their new-age electric arc furnaces, these companies are tough competitors for U.S. Steel.

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Notably, ArcelorMittal (MT) is also working to structurally improve its earnings under its Action 2020 plan. The plan looks to structurally improve MT’s per-ton EBITDA (earnings before interest, tax, depreciation, and amortization) to $85 per metric ton by 2020. This would mean a rise from $62 per metric ton in 2015.

Carnegie Way benefits

The Carnegie Way program has made up a substantial portion of U.S. Steel’s management’s commentary during the company’s last few earnings conference calls. U.S. Steel has announced benefits totaling $600 million in 2016 thanks to the program.

The graph above shows a breakup of these benefits. $600 million is quite a large sum of money for a company that’s generated negative adjusted net incomes for the past several quarters.

Can U.S. Steel win the game?

As discussed previously in the series, spot steel prices have risen significantly this year. Now, it’s up to U.S. Steel to justify investor confidence with its earnings. The stage is set: It’s important for the company to show that Carnegie Way is not merely management jargon.

Meanwhile, steel industry indicators have been decent in 2016. You can explore this further in our series A Deeper Dive into May 2016 Steel Industry Indicators.

You can also visit Market Realist’s Steel page for information on other recent developments in the steel industry.

Investors looking to diversify the risk of investing in single securities can consider the SPDR S&P Global Natural Resources ETF (GNR). Almost one-quarter of GNR’s holdings are invested in steel and other metals companies.

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