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December 2, 2008 Dear Friend, We completed a detailed review of the steel industry and U.S. Steel, which is attached. Steelmaking ingredients have been in oversupply, paced by an estimated 8% gain in iron ore output this year, while global steel output fell 13% in October. The era of "marking up" ingredient price shortages is over, and the easy profits are gone. The $196 record share price is a memory. We estimate that pension and VEBA medical trust assets have lost about $5 billion in value in 2008, which reduces the balance sheet to a deficit tangible net worth. We estimate revenues will fall from $22.5 billion in 2008 to $14.5-$15.0 billion for the foreseeable years, and that a portion of the 25% or $5 billion in needed cost reductions will come from volume declines and "automatic" declines in moly, steel scrap or profit-sharing costs. However, higher pension expense and met coal contracts expiring near $80 per ton will increase costs in 2009. We estimate the company needs to cut discetionary costs by $1.75 billion in order to contain net losses under $100 million. We esimtate a $3+ loss for 2009, and that U.S. Steel needs to cut flat-rolled variable costs by 14%, tube by 27% and European costs by 21%. We rate U.S. Steel Underweight with a $25 price target because we believe other companies or markets have better upside potential. For example, global copper, nickel and gold mine outputs fell in 2008, and prevented larger oversuppplies. Specialist Allegheny Technologies benefits from silicon transformer alloys, titanium, high-nickel jet engine and other special alloys. Other markets appear more poised to rebound or retain a degree of profitabiliy. Faithfully, John C. Tumazos |
Copyright © 2008 John Tumazos Very Independent Research,
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