Asset revitalization plan
During its 4Q16 earnings call, U.S. Steel (X) outlined an asset revitalization plan and earmarked substantial funds for this program. The company expects to improve its long-term profitability and minimize disruptions to operations under this plan.
Under the asset revitalization plan, U.S. Steel expects 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.
U.S. Steel (X) expects its slab production capacity to increase by 1.0 million tons by 2020 from the current level of 10.0 million tons. By 2020, U.S. Steel expects these investments to add $275 million–$325 million to its 2016 baseline EBITDA[1. earnings before interest, tax, depreciation, and amortization], assuming current market factors such as raw material costs.
According to U.S. Steel, the projected increase in EBITDA would represent an IRR (internal rate of return) of 15%–20%, which is higher than the company’s weighted average cost of capital.
On the face of it, the plan looks encouraging and could help U.S. Steel in the long term in this volatile and highly cyclical industry. However, the company would need a supportive external environment to fully realize the benefits of its investments.
In the next article, we’ll see how U.S. Steel’s Tubular segment performed in 3Q17.