Key issues for U.S. Steel
As we saw in the first part of this series, United States Steel (or U.S. Steel) (X) has had net losses in six of the last seven years. However, the company posted adjusted profits in fiscal 2012 and 2013, if we exclude the impact of restructuring charges. In this part of the series, we’ll look at some of the key issues plaguing U.S. Steel.
Higher operating leverage
U.S. Steel produces steel in traditional blast furnaces, most of which are very old. Blast furnaces have a high operating leverage, which means they have a high fixed-cost structure. High fixed costs aren’t such a big issue when plants operate at higher utilization rates. The problem arises during slowdowns when production declines. Fixed costs get distributed among a fewer number of units, which leads to higher unit production costs.
Along with higher operating leverage, U.S. Steel had some operational inefficiencies as well. For instance, the company’s working capital was higher than other steel producers (XLB). It was paying its suppliers earlier than its peers were. On the receivables side, it was taking more time to collect payment from its customers.
The weakness in the energy sector’s steel demand has also added to U.S. Steel’s woes. The energy sector was among the major end markets for U.S. Steel.
U.S. Steel has a leveraged balance sheet, and its leverage ratios are much higher than its peers Nucor (NUE) and Steel Dynamics (STLD). U.S. Steel generated negative free cash flows in five of the last seven years, which further deteriorated the company’s leverage ratios. AK Steel (AKS) also has high leverage ratios.
But U.S. Steel has been taking several measures to survive the current market slump. We’ll take a look at these efforts in the next part.