The Wall Street Journal-20080130-U-S- Steel-s Net Drops 88- on Higher Costs

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U.S. Steel's Net Drops 88% on Higher Costs

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U.S. Steel Corp. posted an 88% drop in fourth-quarter earnings, hit by weakening U.S. and European economies and higher costs for raw materials, transportation, energy and restructuring.

The fall in profit, along with comments that costs and raw-materials pricing will be volatile in the first quarter, sent the company's shares down. In 4 p.m. New York Stock Exchange composite trading yesterday, the shares fell $7.49, or 6.8%, to $102.58.

The Pittsburgh company expects cost increases for steelmaking materials, including purchased scrap, coke and alloys, in the first quarter. For example, the price of coal in the U.S. is expected to rise to $125 a ton, which represents a 5%-to-10% increase from year- earlier levels.

Even though demand is weaker, prices remain firm and are rising, largely because inventories are tight and because steelmakers are trying to pass on higher steelmaking costs. "Prices are also expected to be higher as increasing spot-market prices will be realized throughout the quarter," Chief Executive John Surma said.

The latest quarter included $117 million, or 98 cents a share, in costs related to an early retirement program at the company's European operations and to reconcile inventories of recently acquired companies.

U.S. Steel also was hurt by blast-furnace outages, the company said.

For the full year, U.S. Steel said net income fell 36% to $879 million, or $7.40 a share, compared with $1.37 billion, or $11.18 a share, in 2006. Revenue rose 7.3% to $16.87 billion.

Steelmakers are one of the first industries to experience a softening economy, as the sector's customers, including auto makers, appliance manufacturers and construction companies, begin to curtail production in anticipation of softer consumer demand.

Many domestic steelmakers in the U.S. have put in price increases, because steel mills have had limited production over the past few months and imports cost more because of higher shipping costs.

Customers are willing to pay those prices, said Aldo Mazzaferro, steel analyst for Goldman Sachs. The steel industry's low inventories "have made the buyers nervous about satisfying the spring demand season," he said.

Mr. Surma said the company will be able to take advantage of favorable supply-side conditions as the year progresses.