New U.S. Steel leader faces tough challenges

2013-09-14T05:00:00Z New U.S. Steel leader faces tough challengesJoseph S. Pete joseph.pete@nwi.com, (219) 933-3317 nwitimes.com
September 14, 2013 5:00 am  • 

U.S. Steel recently overhauled its leadership after years of losses and a cement-booted stock price that has sunk by about 90 percent since 2008, but an analyst warns a turnaround will not be easy.

Former Alcoa executive Mario Longhi is the Pittsburgh-based steelmaker's new chief executive officer, and former Caterpillar Inc. executive David Burritt is the chief financial officer. General counsel James Garraux will retire at the end of the year, after 34 years with the company.

The 112-year-old steelmaker that built the city of Gary has rarely made outsiders leaders but has long needed a fresh start, said Charles Bradford, a New York-based industry analyst.

The company's new leadership will face strong headwinds that include stagnant demand for steel, high operating costs, a global overabundance of steelmaking capacity and a culture that resists change, Bradford said.

All U.S. steelmakers have been struggling since the recession dragged down international demand, Longhi said while addressing the Pittsburgh Tech Council in late August. Mills were operating at about 91 percent capacity in August 2008, but were only running at 34 percent capacity six months later.

"While the U.S. steel industry still has not returned to pre-recession production levels, one fundamental has remained unchanged and gives our industry cause for some optimism," he told the crowd of business people. "Steel is a material that never goes out of style. It remains essential to building, maintaining and advancing modern societies."

U.S. Steel stock had been trading for $196 a share in 2008, when the Chinese economy seemed to have an insatiable demand for steel. After the downturn and four straight years of losses, the stock price has been hovering between $16 and $20 a share since the spring.

The company, which still has a huge presence in the Calumet Region that includes Gary Works, East Chicago Tin and the Midwest Plant in Portage, lost $78 million in the second quarter. U.S. Steel has not turned an annual profit since 2008.

"The costs are largely fixed, and they need more volume," Bradford said. "But given the raw material advantage, it's a bit perplexing how things can be this bad."

 

Reversing nagging issues?

The steelmaker has a cost advantage of more than $100 per ton in iron ore, as compared to its mini-mill competitors in the south, Bradford said. But U.S. Steel has still struggled financially because of costs such as rising pension fund obligations, anemic demand for steel and depressed prices for products such as hot-rolled coil.

Older integrated mills such as Gary Works also have higher operating and maintenance costs, Bradford said.

"They're not as cost-effective as new mills," he said. "But the costs are better than they were. They used to have to call in an electrician to get a light bulb changed."

Management also has made mistakes, such as buying an unprofitable mill in Serbia and later selling it back to the government for $1, selling off Brazilian mines that later turned out to be lucrative, and investing hundreds of millions in unproven coke technology at Gary Works, Bradford said. But the company's current struggles reflect more than just how it has been run.

"The stock price decline isn't completely a reflection on management," he said. "The management didn't cause the recession."

Longhi joined U.S. Steel last year, and has since been spearheading a company-wide cost-cutting initiative known as Project Carnegie that is aimed at making the company profitable even during downturns. He has been evaluating all business processes to look for ways to boost revenue, reduce cost and improve financial performance, but details have been scant so far.

All employees are being asked to contribute to the initiative.

"We want to expand how our people at every level and at every facility see things in order to help them generate new ideas," he said.

"Every employee can have a spark of creativity that leads to the identification of new opportunity for change ... and more than one spark per employee is certainly possible. In some Toyota production facilities, a single employee can generate upwards of 300 new ideas in a single year."

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