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U.S. Steel’s Asset Revitalization Plan

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Asset revitalization plan

During its 4Q16 earnings call, U.S. Steel (X) outlined an asset revitalization plan and earmarked substantial money for this program. The outlay was further increased during the company’s earnings call. However, the lack of details about the program, coupled with a massive earnings miss and guidance cuts, spooked the markets. The rest, as we all know, is history. U.S. Steel witnessed its worst single day fall after its 1Q17 earnings release, and investors lost more than 26.0% in one day.

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2Q17 earnings call

During its 2Q17 earnings call, U.S. Steel provided a lot of transparency about its asset revitalization plan. The company intends to spend almost $1.2 billion over the next few years to modernize its facilities. These investments would be spread across its various business operations, from making iron ore to steel finishing. The company expects to spend between $200.0 million and $250.0 million in 2017. Next year, investments are expected to be between $450.0 million and $500.0 million, while the balance will be spent in 2019 and 2020. Now, we might wonder how investors could benefit from this program. Let’s look at that in perspective.

2020 forecast

U.S. Steel expects its hot band production capacity to increase by 1.0 million tons from the current level of 10.0 million tons by 2020. The company expects these investments to add $275.0 million–$325.0 million to its 2016 baseline EBITDA (earnings before interest, tax, depreciation, and amortization), assuming a constant market scenario.

AK Steel (AKS) also expects its maintenance expenditure to increase this year. Amongst other steel companies (STLD), ArcelorMittal (MT) and Nucor (NUE) have looked at inorganic growth as the steel market shows signs of recovery.

Guidance for its 2017 EBITDA was another highlight of U.S. Steel’s 2Q17 earnings call. We’ll look at that next.

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