Stelco weaning itself off American sales
While U.S. tariffs cost $39M in third quarter, steelmaker posted 84 per cent revenue growth
Stelco says if American tariffs are not lifted over the next several months, the steelmaker will essentially give up on selling product in the U.S. and focus attention on domestic sales.
As it is now, 24 per cent of the steelmaker’s production is exposed to U.S. tariffs, leading to $39 million in costs in the third quarter, Alan Kestenbaum, the company’s chief executive officer, said in an earnings conference Wednesday.
But Stelco is working toward wrestling those costs down to zero, he said, “either as a result of our ongoing shift in sales ... or as a result of ongoing governmental negotiations that will ultimately remove tariffs all together.”
Even with the tariffs costs, Stelco delivered astounding financial results in the third-quarter figures released Tuesday that showed an 84 per cent increase in revenue and 43 per cent jump in shipping volumes compared to the same quarter last years.
“I thought there would be an upward curve. But this is stunning,” said University of Toronto steel expert Peter Warrian.
Third-quarter revenue for 2018 increased by $283 million to $619 million, compared to $336 million posted in the same quarter last year.
The company says it moved
586,000 net tonnes of steel in the third quarter compared to 411,000 in 2017, which is significant because many thought sales would decline with the 25 per cent steel tariff imposed by U.S. President Donald Trump in June.
Instead, shipments went up. The company reported adjusted earnings of $135 million — or $1.52 per share.
Those results — and strong words from Kestenbaum that financial markets have drastically undervalued the company — sparked a 10.1 per cent jump in Stelco Holdings Inc. shares as high as $20.42 in mid-afternoon trading on the Toronto Stock Exchange. Shares closed at $19.80, up 9.70 per cent.
The figures are interesting because they show the 25 per cent tariff on steel sales to the U.S. imposed by Trump in June has been largely nullified in a hot steel trade that has seen prices near $1,000 a metric tonne, up from $700 at the beginning of the year.
And it all begs the question: How much of the company’s remarkable turnaround — out of bankruptcy protection in June 2017 — is good management, and how much is good luck?
Warrian said, “They have to get credit for doing a serious job of getting this company back to centre stage, but doing that has been a whole lot easier with this revenue spike from high steel prices and the strong American economy.”
Asked about the long term viability of letting go of American sales to avoid tariff costs, Warrian said he has doubts.
Traditionally, he said, big Canadian steelmakers rely on at least 20 per cent their sales to the U.S., so for Stelco to sidestep that market would be highly unusual.
Kestenbaum praised the federal government for quickly imposing retaliatory tariffs against the U.S. and more carefully monitoring offshore steel coming into Canada. Those moves that created “retreating supply” of steel have created new domestic market opportunities for Stelco that the company plans to further exploit.
According to a company release, “In the fourth quarter, we are expecting a significant increase in shipments, stable pricing and higher earnings.”
As well, Kestenbaum believes once the new USMCA trade deal is signed, there will be an increase in demand for steel.
Meanwhile, because he believes “our shares are way undervalued,” Kestenbaum said Stelco is launching a share buy-back plan for up to five per cent of the firm’s outstanding stock — 4.4 million common shares.
Kestenbaum said Stelco is moving ahead with plans to develop more than 3,000 acres of land it purchased in the second quarter at the former Hilton Works on Hamilton’s Bayfront and at the company’s Nanticoke operation.
“To that end, we have begun hiring staff specialized in real estate development, hired a firm to develop a land plan and began marketing some of the properties for rental to the very strong industrial market in the Greater Toronto Area,” the company said.