Iron ore price decline hurts U.S. Steel’s cost advantage over rivals
U.S. Steel Corp.’s cost advantage over competitors from owning its iron ore mines is shrinking as the price of the commodity used to make steel sinks to a four-year low.
Analysts said iron ore’s decline to $70 a metric ton puts pressure on the Downtown-based steelmaker because competitors will benefit from lower raw material costs that U.S. Steel has long enjoyed. That pressure will mount as steel prices follow iron ore prices lower, especially helping competitors with lower production costs such as Nucor Corp., U.S. Steel’s chief rival.
“The U.S. Steel guys are going to have to work real hard to separate the revenue declines from external forces,” said John Tumazos of Very Independent Research of Holm-del, N.J. “Everything they’ve done in the last two years to cut costs was necessary, but everything points to more cost cuts.”
Under CEO Mario Longhi’s leadership, the Downtown-based steelmaker has closed mills, saved $500 million by halting an iron ore expansion project in Keewatin, Minn., relinquished control of its money-losing Canadian unit and saved $495 million under its Carnegie Way initiative to cut costs and return to profitability.
“But things are tougher as iron ore prices fall,” Tumazos said. “None of these things are U.S. Steel’s fault; it’s just the way the markets are coming to them.”
The price of iron ore — which accounts for about one-third of the cost to make steel at an integrated producer like U.S. Steel — has been falling because steel consumption in China, the largest user, has been declining. That’s led to a supply glut at Chinese ports, said Kurt Fowler at The Steel Index in Pittsburgh. The decline in Chinese consumption has led to a fall in steel production and the use of iron ore, he said.
At the same time, the world’s biggest iron ore suppliers — Vale in Brazil, BHP Billiton in Australia and Rio Tinto in the United Kingdom — are in the midst of major expansion projects, he said.
Iron ore peaked at $200 a ton in early 2011 and this year has declined 48 percent. Citibank analyst Ivan Szpakowski said in a report that he expects prices to average $72 in the first three months of 2015, dropping to $60 and dipping into the $50s in the third quarter. He forecast average prices of $65 for the next two years.
“Iron ore prices have fallen significantly in 2014. While consensus expects an eventual recovery, we expect persistent weakness,” said Andrew Lane, analyst with Morningstar Inc. in Chicago. “Prices are likely to remain below $80 per metric ton through the end of the decade.”
U.S. Steel boasts that its iron ore operations are the largest and lowest cost producer in Minnesota, where most United States production takes place. The company said this week it produced 24.1 million net tons in 2013 at Minntac in Mt. Iron and Keetac in Keewatin.
Citigroup said production will increase by 140 million tons in 2015, with 54 million from Rio Tinto, 30 million from Vale and 15 million from BHP.
Analysts say U.S. Steel’s average cost is about $65 a ton. The stated price from ore miner Cliffs Natural Resources is $100 a ton. But U.S. Steel’s advantage over Cliffs is slipping as the Cleveland company’s prices have fallen from $112 a ton a year ago, said Charles Bradford, analyst with Bradford Research Inc. in New York. But foreign ore could pose a bigger threat.
“Brazil is where the competition is,” Bradford said.
The price from Vale, Rio and BHP, which ship ore worldwide on large ocean-going ships, average $45 to $50 per ton. But U.S. Steel maintains an edge because foreign producers face shipping tolls that could add as much as $60 per ton to transport iron ore on the Great Lakes to steel producers in the Midwest.
Lane with Morningstar believes companies such as U.S. Steel that are fully self-sufficient in iron ore and scrap will be most likely to see their competitive position deteriorate because of lower seaborne iron ore prices through 2020. Steelmakers that are fully self-sufficient in raw materials cannot adjust costs easily as spot prices fluctuate for iron ore, scrap, metallurgical coal and steel, he said. AK Steel, which has a plant in Butler, is another example, he said.
Lane said U.S. Steel’s iron ore self-sufficiency will drive lower profit as average selling prices decline through 2015. “U.S. Steel seems to have acknowledged its unfavorable positioning, given its plans to replace multiple blast furnaces with electric arc furnaces,” Lane said.
In January, Longhi disclosed a plan to replace an aging blast furnace in Fairfield, Ala., with an electric furnace that makes steel from scrap by 2017. Last month he said the company’s board of directors approved the plan to replace an aging blast furnace, and said the company will install more than one electric furnace to replace aging equipment.
“When you go to electric furnaces and walk away from U.S. Steel Canada, you will have a lot less appetite for iron ore,” Tumazos said. “It was a good decision for Mario Longhi to back off the iron ore expansion.”
John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or [email protected].