U.S. Steel sinks after it says it will lay off 1,500 and cut its dividend to 1 cent

GP: US Manufacturing Steel mill California, GDP
Casters are showered with sparks, or ‘skeeters,’ as molten steel is shaped into bars called ‘billets’ at the TAMCO steel mini mill on in Rancho Cucamonga, California. David McNew | Getty Images

United States Steel headed for one of its worst days of the year on Friday after it cut its dividend to 1 cent, warned that fourth-quarter profit losses will be worse than expected and announced plans to lay off about 1,500 workers at a Michigan plant.

It added in its Thursday announcement that it expects fourth-quarter adjusted diluted loss per share of about $1.15 and a full-year loss per share of 42 cents.

Chief Executive David Burritt said that persistent weakness in the U.S. steel market and industry cost headwinds are to blame for the company’s performance and help explain both the financial and operational changes.

“While the current realities of the markets we serve are having a significant impact on our short-term results, we are taking swift action to align our operational footprint and financial strategy,” he said in a press release. “Fourth quarter expected results confirm the need to change to make the business more resistant to factors outside of our control.”

Shares sank 8% in New York Friday morning; the equity has lost 33% of its value in 2019.

As part of its restricting and cost-saving attempts, U.S. Steel will indefinitely idle a significant portion of its Great Lakes Works operation on around April 1 and shutter its rolling facility for making sheet steel before the end of 2020.

“These decisions are never easy, nor are they taken lightly,” Burritt added in a separate release. “However, we must responsibly manage our resources while also strengthening our company’s long-term future – a future many stakeholders depend on.”

U.S. Steel also reduced 2020 capital spending by $100 million and terminated in stock repurchase program to conserve cash.

But the Pittsburgh-based steel giant isn’t the only company in the industry to flag softer earnings potential and pricing during the quarter.

Notwithstanding President Donald Trump’s worldwide steel and aluminum tariffs introduced in 2018, prices for hot rolled steel futures have sunk more than 25% over the last year.

Analysts have explained that a combination of less drilling for oil and natural gas, the General Motors strike this fall and falling production of farm machinery have plagued demand for steel over the past 12 months.

The GM swoon in particular could have lasting effects since automobiles represent about 25% of U.S. carbon steel demand and 40% of sheet demand, wrote KeyBanc analyst Philip Gibbs.

“We estimate GM will not have the ability or desire to make up the entirety of the production lost from the strike in 2020 given higher wages/overtime needed,” he wrote last month.

“While auto, energy, and oil and gas markets are tepid/mixed, nonresidential construction demand remains resilient,” he added. “Within a late-cycle backdrop characterized by more normalized profits and limited global growth, we continue to strategically favor more defensive” names.

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