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A Provocative Idea for U.S. Steel: Stop Making Steel

The author suggests that the original U.S. Steel method of making steel, that is melting iron ore in coke fueled furnaces, may not be competitive with electric arc mini mills. 

Below is reprinted from Barron's. Original article by Mr. Al Root.

At the dawn of the 20th century, America dominated steel. The U.S. share of global steel production in 1901 was about 50%. Today? Only about 5%

1901 was the year Andrew Carnegie sold Carnegie Steel to John Pierpont Morgan Sr. for $480 million dollars—creating United States Steel (ticker: X). Back then, U.S. Steel was the largest steelmaker in the world. Early on, its stock was a winner. U.S. Steel stock rose from $55 per share in 1901 to $260 in 1929—right before the stock market crash. The shares haven’t been back to $260 since, but the company is still making metal 117 years after its formation. That’s an impressive feat.

Now, one Wall Street analyst has a provocative idea for the company: stop making steel altogether.

The reason isn’t obvious, but it might mean that profits at U.S. Steel improve. That’s a bold idea. Even if investors don’t think U.S. Steel can (or will) stop making steel, following this analyst’s logic can help investors identify hidden values elsewhere.

“U.S. Steel has long term value because they make iron,” says Aldo Mazzaferro. He’s a longtime steel analyst from Goldman Sachs now running an independent research boutique. Pig iron is the precursor to steel that comes out of a blast furnace. “It wouldn’t be an easy transition for them to stop making steel, but it doesn’t necessarily mean they would make less money.”

Mazzaferro said U.S. Steel has trouble competing with “minimills,” facilities that make steel by remelting scrap using electric arc furnaces. Like the name implies, these facilities are smaller—and cheaper to build and run—than the massive infrastructure U.S. Steel owns. U.S. Steel starts by mining its own iron and mixing it with coal in a blast furnace to produce pig iron. Oxygen is blown through the molten iron at supersonic speeds to turn pig iron into steel.

U.S. Steel declined to comment.


But Mazzaferro argues that Nucor and other minimill operators can’t make pig iron. “You can’t satisfy all demand for steel with scrap, someone has to make iron,” he said. “It’s a radical proposal for sure, but I would bet if you could get the internal numbers they make their greatest profit margins and greatest free cash flows on the upstream [pig iron] products.”

The idea of stopping all steel production is theoretical of course. There are legacy costs like pensions and environmental remediation, as well as existing employees to be considered. But it highlights two things investors should pay attention to: money losing divisions and replacement costs.

In the first case, shutting down or selling a struggling unit can make a business look much better than investors expect. And another way of stating Mazzaferro’s argument about U.S. Steel is to say that mining and blast furnaces assets the company owns are worth more than today’s entire market value for U.S. Steel.

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