US Steel sees industry comeback, costs crimp growth

Wed Jun 23, 2010 8:13am IST

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* The worst is over in steel industry

* High material costs give integrated producers an advantage

* US steel use tends to return to average of 120 mln tons/yr

By Carole Vaporean

NEW YORK, June 22 (Reuters) - United States Steel Corp (X.N), one of the largest U.S. steel producers, thinks the worst of the steel industry's downturn is over, but sees the high cost of raw materials used to produce the metal as having an inhibiting impact on profitability.

"The overwhelming dynamic affecting the pace and level of our industry's return to profitability today is the state of the raw materials markets," Chief Executive Officer John Surma told American Metal Market's 25th Steel Success Strategies conference on Tuesday.

"Roughly, 70 cents of every steelmaking dollar today goes into the purchase of raw materials and energy," he added, noting that iron ore and metallurgical coal costs, the raw materials used to make steel, continue to rise.

As a result, he said, the advantage in the current market goes to steel producers integrated with iron ore or metallurgical coal mines, pointing to North American steel producers as having more balanced resources than either Asian or European steel producers.

In North America, Surma said, U.S. Steel owns a large portion of its raw materials supply. Whereas, in Europe, it contracts for both iron ore and coal.

"And while we are not directly subject to the seaborne market price changes that encumber many Asian and Western European steelmakers, we are definitely feeling the effects."

He later told Reuters that U.S. Steel does not buy much iron ore for its North American operations.

"In Europe, we're arriving at arrangements that you're reading about for seaborne trade. Not exactly the same, but similar. Our iron ore supply is going to be shorter term."

"On the customer contract side, we're mostly a spot player. So, we don't have as much of an issue with that," he said.

This year, the world's top three iron ore miners, with control of two-thirds of the seaborne iron ore trade, abandoned a decades-old annual benchmark setting system, and forced steelmakers to settle for quarterly prices. [ID:nN01132267]

The shorter-term contracts tend to increase price volatility. Asked whether Surma planned to hedge that risk with futures or other similar contracts, he said, "Not yet. That's something that's talked about a lot, but doesn't really happen that much. We'll have to look at that when the time is right."

Otherwise, the Pittsburgh-based company will continue to invest in existing facilities and explore expansions, acquisitions and joint venture opportunities, the CEO said.

U.S. Steel thinks the industry comeback is just beginning to develop, in line with early stages of recovery in the United States and global economies.

"Looking ahead, the cloud cover is definitely lifting. Perhaps the worst is behind us," Surma said.

Taking a longer-term view of U.S. steel consumption, he said, over the past 15 years, it tends to return to an average of 120 million tons per annum.

"Domestic steel consumption has always returned to this trend line over time. There is good reason to believe that it will get there again," he said.

Asked about demand for U.S. Steel's metal, he said, "Some markets are doing pretty well. Half of the markets we have a decent position in. So, we're operating at a reasonably good level."

With concerns about overcapacity in the North American steel market, Surma was asked by Reuters whether U.S. Steel was considering shutting down any of its operations there.

"We consider the right configuration all the time, but we haven't made a decision that we can talk about publicly," citing the blackout period before the steelmaker announces its earnings results for the second quarter.

"We take what the order books give us and try to configure our operating facilities to meet that with what's cost effective. Logistics, cost structures, all things come into it. At some point during the cycle there are some facilities that don't have enough book to keep them open. To make those decisions we really have to take a long view," the CEO said. (Reporting by Carole Vaporean; Editing by Himani Sarkar)

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