* The worst is over in steel industry
* High material costs give integrated producers an
* US steel use tends to return to average of 120 mln
By Carole Vaporean
NEW YORK, June 22 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
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)