Fitch Ratings has assigned a 'BB'/'RR4' rating to United States Steel Corporation's (U. S. Steel) new $240 million Environmental Improvement Revenue Bonds, Series 2023 issued by the Arkansas Development Finance Authority on behalf of United States Steel Corporation (U. S. Steel).
Proceeds will be used for qualifying project expenses associated with the new $3 billion, three-million-ton, flat-rolled mini mill in Osceola, Arkansas (Big River 2).
Key Rating Drivers
Conservative Leverage Expectations: Fitch expects EBITDA leverage, roughly 1.0x at Dec. 31, 2022, to be slightly elevated in 2023 in line with Fitch's expectation for lower margins and economic weakness, but to remain below 2.5x on average from 2024-2026. U. S. Steel reduced total debt outstanding by more than $2.0 billion since 1Q21 and has no outstanding borrowings on its credit facilities. Fitch expects EBITDA to moderate from the 2021/2022 peak of around $5 billion per year, but to average around $1.5 billion-$2 billion annually after 2023. This compares with Fitch-calculated EBITDA of approximately $1.5 billion during a previous high point in the cycle in 2018.
Best for All Strategy: Fitch views U. S. Steel's strategy to invest in flexible and lower-cost, less capital-intensive, more-efficient assets positively and believes it will improve EBITDA and the company's overall cost position and operating profile resulting in reduced earnings volatility through the cycle. U. S. Steel acquired a 49.9% equity interest in Big River Steel in 4Q19, an electric arc furnace (EAF) facility with 3.3 million tons of annual capacity, and acquired the remaining equity interest in 1Q21.
In 1Q22, U. S. Steel began construction on a $3 billion new three-million-ton mini mill (Big River 2), with production expected to begin in 2024. Fitch believes Big River 2, in addition to the new value-added lines being constructed at Big River Steel, will lower the company's overall cost position improving margins and EBITDA generation.
Strong Liquidity Position: U. S. Steel generated over $1.7 billion of Fitch-calculated FCF in 2022, and the company had cash and cash equivalents of $2.8 billion as of March 31, 2023. Fitch believes cash on hand in combination with future cashflow generation will likely be sufficient to fund the majority of the new $3 billion investment to build Big River 2 in addition to other strategic capex. The ability to fund capex with cash on hand and internally generated cash lowers the risk of compromising the balance sheet if there is a period of prolonged economic weakness.
Strategic Capex Improves EBITDA: U. S. Steel began construction on a $450 million nongrain-oriented (NGO) electrical steel line at BRS in 3Q21. The 200,000-ton NGO electrical steel line is expected to deliver first coil in 3Q23 and be available to meet growing electric vehicle demand expected in North America over the coming years. U. S. Steel also announced a 325,000-ton galvanizing/galvalume line at BRS in 3Q21. Fitch expects this $280 million investment to expand the company's presence in value-added construction and appliance applications. Both the NGO line and galvanizing/galvalume lines are expected to enhance BRS's product mix.
U. S. Steel began producing pig iron in 4Q22 at a new $60 million pig iron facility constructed at Gary Works. The facility is expected to have production capacity of around 500,000 tons of pig iron intended to be consumed internally at its EAFs and provide nearly 50% of BRS's current ore-based metallics requirements. In 3Q22, U. S. Steel began construction of a $150 million direct reduced (DR)-grade pellet facility at its Keetac iron ore operations which is expected to be operational in 2024. The new facility provides the ability to produce DR-grade pellets for EAFs in addition to providing the flexibility to continue producing BF-grade pellets and optionality to ship to third parties.
Derivation Summary
U. S. Steel is comparable in size and has a similar operating profile compared with Cleveland-Cliffs (BB-/Stable) as both companies are integrated and have both blast furnace and EAF production, but are primarily blast furnace producers. U. S. Steel is more diversified by product and geography with slightly more favorable credit metrics than Cleveland-Cliffs.
U. S. Steel is larger in terms of annual shipments compared with EAF steel producer Commercial Metals Company (CMC; BB+/Stable). U. S. Steel has higher product and end-market diversification compared with CMC, but CMC has historically had lower leverage metrics and its profitability is less volatile, resulting in more stable margins and leverage metrics through the cycle. U. S. Steel is larger in terms of total shipments, but it is less profitable with weaker credit metrics compared with EAF producer Steel Dynamics, Inc. (BBB/Stable) and smaller with less favorable metrics compared with EAF producer Nucor Corporation (A-/Stable).
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer:
Declining flat-rolled steel prices through 2026;
Combined Flat-rolled segment and Mini Mill segment steel shipments of approximately 11.0-11.5 million tons in 2023, increasing as Big River 2 comes online in 2024;
Capex of approximately $2.5 billion in 2023, declining significantly thereafter following completion of the new mini mill;
The new mini mill is funded primarily with internally generated cash;
Share repurchases made with excess cash flow.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Visibility into completion of the new $3 billion mini mill on time and on budget, in addition to the ability to fund the project primarily with internally generated cash;
EBITDA margins sustained above 12%;
EBITDA leverage sustained below 2.3x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A material weakening of domestic steel market conditions leading to EBITDA leverage sustained above 3.3x;
EBITDA margins sustained below 10%.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Solid Liquidity: U. S. Steel had roughly $2.84 billion of cash and cash equivalents as of March 31, 2023 and roughly $2.44 billion, in aggregate, available under its $1.75 billion asset-based loan (ABL) credit facility due 2027, its U. S. Steel Kosice, s.r.o. credit facilities due 2026 and the BRS ABL due 2026.
Issuer Profile
U. S. Steel is an integrated steel producer of flat-rolled steel and tubular products with operations in North America and Europe. The company has a combination of blast furnace and electric arc furnace capacity.
Date of Relevant Committee
10 June 2022
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
UNITED STATES STEEL CORPORATION 
