Stelco Defies Headwinds, Looks Forward to Opportunities

“We faced a number of strong headwinds, including destocking, falling market prices and continued Section 232 tariffs that impacted us throughout the quarter,” said CEO David Cheney. “Despite these headwinds, we lowered our cost per ton, we remained profitable and we generated positive cash flow. Further, as the quarter concluded, many of the previously mentioned headwinds ceased and were replaced with tailwinds: customer demand is strong, reflected in a robust order book and extended lead times; steel prices have rallied; S232 tariffs have been eliminated; and we are aggressively pursuing further cost reductions.”

Looking ahead to the second half, Stelco expects volumes to better align with historical customer demand as well as achieving $25-50 million in cost reductions. Stelco hopes to ship 1.3 million tons in the second half of 2019.

The lifting of Section 232 tariffs was welcome and may lead to some incremental tons into the U.S., said Cheney. “Our priority is to serve all of our existing customers, a significant portion that are in Canada. During the 232 period, we honored all of our customer commitments in the U.S., but in terms of placing incremental tons we’re always mindful of tariff. So, with tariffs going away, we’re really pleased that the U.S. and Canada are working together again to facilitate supplying steel in the interconnected supply chain.”

During the company earnings call, Cheney talked about “tactical flexibility” and the company’s willingness to change and adapt to market conditions and external pressures. Adapting includes improving facilities and getting products to customers in a more timely manner. “The addition of nearly 400 leased rail cars and vessel shipments from our Lake Erie dock offers many benefits, greater logistics flexibility, quicker delivery times, lower freight costs and a reduced carbon footprint,” said Cheney. Twenty percent of shipments during the second quarter were via vessel and rail.

During the second quarter, the company invested in new batch annealing equipment, adding 200,000 tons of fully processed cold rolled to its product mix. In July, an upgrade on the Lake Erie Works Coke Battery is expected to boost coke production by 100,000 tons over 2018 levels. A complete reline of the Lake Erie blast furnace is scheduled for 2020 that will increase capacity by 300,000 tons.

“We’re also going to make some repairs and upgrades to our BOF. And look, just to remind you, this is the first full reline at the Lake Erie blast furnace in the company’s history,” said Cheney.

Overall, $451 million will be spent on innovative projects in the next two years, the company said. Part of that will be a $50 million grant from the federal government’s Strategic Innovation Fund.

“It’s about upgrading and modernizing our steelmaking operation,” said Cheney. “We’re investing in technology to make some next-generation steels, including some steels that aren’t currently made in North America.”

At the end of Q2, Stelco had cash reserves of $455 million, approximately 40 percent of the company’s market value, placing it in prime position for future M&A. In addition, the company has more than 500,000 square feet of existing industrial warehouse space for rent and more than 500 acres of developable land at its Hamilton site. “In short, this land is an incredible asset and has the potential to drive significant value creation,” said Cheney. 

Hamilton MP Filomena Tass praised the company’s progress since it emerged from government bankruptcy protection. “Stelco is a success story,” said Tass. “This company, not that long ago, was in CCAA protection. Look at where they are now — growing, making profits, expanding.”

Note: Monetary references are in Canadian dollars (1 CAD = .75 USD)