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Dark Clouds Hover over U.S. Steel despite Trump’s Tariffs

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  • On Thursday, U.S. Steel (X) provided its fourth-quarter earnings guidance. The company expects to post an adjusted EBITDA of -$25 million in the fourth quarter. If so, the company would report a negative EBITDA for the first time since the first quarter of 2016.
  • U.S. Steel also announced a slew of measures on Thursday including slashing dividends and layoffs. We’ll discuss the announcements and their implications.
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U.S. Steel’s Q4 guidance

U.S. Steel released its fourth-quarter earnings guidance on Thursday after the markets closed. The stock was trading sharply lower in aftermarket trade. The company expects to post an adjusted diluted EPS of -$1.15 in the fourth quarter. The projected loss is much wider than analysts’ expectations. Notably, if the company posts a loss in the fourth quarter, it would mark a loss for the second consecutive quarter. Also, the company would post a net loss for the third quarter under Trump’s presidency.

Negative EBITDA despite Trump’s tariffs

More than the wider-than-expected net loss, I’m worried about U.S. Steel’s projected fourth-quarter EBITDA. The company expects to post an adjusted EBITDA of -$25 million in the fourth quarter. Before the fourth quarter, the company posted a negative EBITDA in the fourth quarter of 2015 and the first quarter of 2016. Currently, US spot HRC (hot-rolled coil) prices are in the vicinity of $600 per ton. The prices have risen sharply over the last month. In 2015, spot HRC prices fell below the $400 per metric ton level. Metall prices fell amid concerns about China’s slowdown.

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Incidentally, U.S. Steel idled plants in 2015 and spot steel prices tumbled. The company announced the curtailments of two US blast furnaces and one Europe blast furnace earlier this year. Reviving the US steel industry was President Trump’s key pre-election plank. Last year, President Trump imposed a 25% tariff on US steel imports. However, the tariffs haven’t led to a sustainable recovery for the company, which the curtailments and losses reflect.

U.S. Steel announced other measures

On Thursday, along with the fourth-quarter guidance, U.S. Steel also announced a slew of measures. The company slashed its dividend and abandoned its share repurchase plan. Share repurchasing wasn’t the best strategy for the company in the first place, as we noted last year. The company’s weak balance sheet and elevated cash requirements amid the asset revitalization plan don’t give it the privilege to splurge on buybacks. U.S. Steel cut its dividends to a penny per share. Although the savings won’t move the needle much, every penny counts considering the tough market conditions.

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Great Lakes Works curtailment

U.S. Steel also announced more plant curtailments on Thursday. The company will curtail significant iron and steel operations at Great Lakes Works next year, which will lead to job losses. U.S. Steel said, “The company will be issuing Worker Adjustment and Retraining Notification (WARN) Act notices to approximately 1,545 employees at Great Lakes Works, although we anticipate the final number of employees who will be impacted by the idling will be lower.” The company also lowered its 2020 capital expenditure guidance by $75 million.

In June, the company announced plant curtailments on the same day that President Trump started his 2020 campaign. The current round of plant curtailments is coming amid President Trump’s impeachment. He talked about reviving US manufacturing in his 2016 campaign. Measures like tax cuts and tariffs were expected to bring manufacturing jobs back to the US. However, that hasn’t been the case. US manufacturing and corporate investments have sagged over the last year.

Implications

With plant curtailments, U.S. Steel would become a leaner enterprise. The company will align its production better with market dynamics. U.S. Steel is also betting on mini-mills to revive its fortunes. The company is developing an electric arc furnace in Fairfield. U.S. Steel has taken a stake in Big River Steel, which produces steel in electric arc furnaces. Lower production by domestic mills and the fall in imports drove US steel prices higher. The dividend cut and lower capex would help the company conserve some cash amid the challenging market.

While President Trump claimed that his tariffs have revived the US steel industry, that isn’t exactly the case. Will steel and steel jobs be a potent weapon for the Democrats as the 2020 election approaches? We’ll have to wait and see.

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