美國鋼鐵 (X) 2008 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the United States Steel Corporation second quarter 2008 earnings conference call and webcast.

At this time, all participants are in a listen-only mode, later we will conduct a question and answer session, instructions will be given to you at that time.

(OPERATOR INSTRUCTIONS) As a reminder today's call is being recorded.

I would now like to turn the conference over to your first speaker Mr.

Nick Harper.

Please go ahead.

Thank you.

Good afternoon, and thank you for participating in United States Steel Corporation's second quarter 2008 earnings conference call and webcast.

We will start the call with some brief introductory remarks from U.S.

Steel Chairman and CEO John Surma; Next I will provide some additional details for the second quarter; and then Gretchen Haggerty, U.S.

Steel Executive Vice President and CFO will comment on the outlook for the third quarter.

Following our prepared remarks we will be happy to take any questions.

Before we begin, however I must caution you that today's conference call contains forward-looking statements and that future results may differ materially from statements or projections made on today's call.

For your convenience, the forward-looking statements and risk factors that could affect those statements are referenced at the end of our release and are included in our most annual report on Form 10-K and updated on our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions.

To begin the call here is U.S.

Steel Chairman and CEO John Surma.

Thank you, Dick.

Good afternoon everyone.

And thank you for joining us.

Earlier today, we reported record second earnings of $5.65 per share.

Excluding the $0.03 per share effect of one item not allocated to our segment results.

Our earnings were $5.68 per share, which exceeded the $5 per share high-end of analyst expectations.

I understand that consensus was $3.91 per share.

Turning to our segment results, second quarter operating income, of $954 million, more than tripled our first quarter results as our operating group did an outstanding job running our facilities this quarter.

We operated almost 93% of capability in North America, and at a record 104% in Europe.

In addition, we operated at 101% of capability in Canada, and achieved the highest ever quarterly production for our two Canadian plants in only our second full quarter of ownership.

Just as important, as our strong operating performance, our safety performance continued to improve during the quarter.

This confirms our strong belief in the alignment of a world class safety performance with strong operating and financial results.

Our North American flat rolled segment earned record operating income of $478 million.

Nearly quadruple our first quarter results.

Compared to the first quarter, second quarter average flat roll pricing increased by $131 per ton, to $777 per ton, which reflected the series of spot price increases implemented during the first half of the year.

The commercial improvement more than offset higher costs for materials.

Particularly purchase coke, scrap and energy resulting in expanded margins.

Overall the North American flat rolled end markets were largely unchanged compared to the last several quarters.

We continue to benefit from strong global steel demand and the relatively weak U.S.

dollar.

In addition, continued low imports and moderate inventory levels and high ocean freight rates are contributing to a balanced North American steel market.

We are taking care to supply our customers needs and supplementing our flat rolled order book with exports and slab sales, to sustain a high level of operations.

In addition, our North American integrated raw material position helped insulate us from a portion of the raw material cost increases particularly iron ore, coke and sea borne coke and coal that impact many of our global competitors.

We are dealing with cost pressures, particularly purchased coke.

Currently we're short about 2 million tons of coke in North America on an annual results basis and we buy about 1.8 million tons of that from global suppliers.

Sea borne coke from China has increased from $200 per metric ton a few years ago to in excess of $700 per ton today.

While our average purchase coke costs are a bit more competitive than that, we have diversified our supply base the high cost of purchased coke has made an assured cost effective supply of coke one of our top priorities.

In that regard, we're working on several major coke-related projects.

Work is underway with SAN coke to construct a non recovery coke battery and co-generation facility at our Grand City Works and we're in the permitting process for the first of two recovery batteries at our Clairton Works and a carbon alloy process facility near our Fairfield Works in Alabama.

Once these projects are completed in the next several years, we should be in a much improved supply position for our North American coke requirements, resulting in a more favorable cost position for the long term.

Flat-rolled average realized prices tracked the sharp increase in spot market prices, for hot-rolled coil which according to CRU, has increased from about $555 per ton in December of last year, to over $1,000 per ton today.

The impact from the first half spot market increases was partially reflected in average second quarter prices and should be more fully reflected in our third quarter results.

In addition, second half contract prices will be positively affected, by the realization of a full quarter of the competitive market adjustments that began in April, and the renewal of several contracts at higher market-related prices.

We have had success implementing contract price adjustments with the number of customers and discussions with other customers, continue.

Our second quarter European segment operating income was $298 million, an 85% increase compared to the first quarter.

Second quarter European average realized prices increased by nearly $200 per ton.

Including currency effects.

Cost efficiencies from record production at 104% of capability helped offset a portion of the rapid rise in raw materials costs, particularly for scrap, iron units and purchased coke.

European end markets remain stable.

As moderate imports and good demand coupled with the surge in global raw materials costs help drive spot steel prices to record levels.

We continue to monitor the commercial environment to ensure that our pricing reflects European market conditions.

In Europe we're more heavily reliant on purchased raw materials and our commercial mix is more geared to the spot market which should allow us to recover higher raw materials costs sooner.

Turning to our tubular segment.

During the second quarter we earned $177 million, more than triple our first quarter results.

For $354 per ton on shipments of 500,000 tons.

Our improved second quarter results were driven by the strong tubular market environment, and an increase of nearly $400 per ton in our average realized prices.

The benefits from higher prices and shipments were partially offset by higher costs for semi finished steel, driven mainly by higher spot prices for hot rolled bents.

We recently announced $800 per ton price increase for all tubular products effective with shipments beginning July 1.

Which includes the $250 per ton surcharge that was announced previously.

This increase reflects the strong demand, caused by higher crude oil and natural gas prices.

In addition, this increase will allow us to recover the much higher operating costs we experienced since the beginning of the year.

Especially for the high alloy contents of our product mix and the hot bands used for our welded products.

The 2008 drilling programs remain strong, and in fact the rig count recently reached a 20-year high.

Activity in the energy markets should continue to support good demand for our tubular products.

We are currently negotiating with the United States Steelworkers for a replacement on the agreement covering most of our domestic operations.

We expect to have the new agreement in place before the September 1, expiration of the current agreement.

As you might have seen earlier today we announced a $0.05 or 20% increase in our quarterly common stock dividend, from $0.25 to $0.30 per share.

Combined with our January increase, we have increased our dividend rate 50% this year.

This increase reflects our confidence in the long-term financial prospects of our Company and underscores our commitment to enhancing shareholder value.

Before I hand it off to Nick let me take a moment to acknowledge and thank our colleague Nick Harper.

Our Manager of Investor Relations for the last four years.

As some of you may know he was recently promoted to a position in our accounting organization.

Nick is being succeeded by our colleague Dan Leznak, who comes from our strategic planning and business development group and is very experienced in steel investor activities.

I believe many of have you spoken with Dan already.

This call represents the conclusion of Nick's outstanding tenure in this role.

And Nick and Dan will work closely to ensure a smooth transition.

Now I will turn the call over to Nick for some additional information about the quarter's results.

Thank you, John.

Capital spending which is detailed by segment in the earnings release totaled $213 million in the second quarter.

Our current plan for 2008 has total capital spending at approximately $940 million with $705 million for North American operations and $235 million for European operations.

Depreciation, depletion, and amortization costs totaled $159 million in the second quarter and are expected to be about $640 million for the year.

Defined benefit and multiemployer pension and OPEB costs for the quarter totaled $49 million.

We made cash payments of $92 million for benefits during the second quarter.

$33 million in required pension contributions and $59 million for retiree insurance plans.

Also during the second quarter, we made a $35 million voluntary contribution to our main defined benefit pension lan and a $23 million contribution to the [DEVA] trust covering steel worker retiree insurance benefits.

Additional details are included in our 10-Q which was filed earlier today.

Second quarter net interests and other financial expense totaled $25 million, including $17 million of favorable foreign currency effects.

Excluding the foreign currency effects we expect third quarter net interest expense to be about $44 million.

Our annual effective task rate for the balance of 2008 is projected to be approximately 27%.

This is a 2% increase from our prior guidance due to the increase in our North American earnings which are subject to higher tax rates than our European earnings.

The catch-up charge for this tax rate change applied to the first quarter income was about $6 million.

Lastly, for the quarter, we average 118.2 million fully diluted outstanding shares.

Gretchen will review some additional information and the outlook for the third quarter.

Gretchen?

Thank you, Nick.

Through the second quarter our cash flow provided by operating activities was $463 million.

Our free cash flow after capital spending and after dividend, but better external financing was $54 million.

I would like to point out that our accounts receivable has increased nearly $800 million since the end of the first quarter, reflecting the significant increase in steel prices during the same period.

We anticipate the benefit of collecting these receivables will start to be reflected in our cash flow from operations, in the third quarter.

We ended the second quarter with $391 million in cash.

And total liquidity of nearly $1.6 billion.

As noted in the earnings release we respective purchased 320,000 shares of common stock in the second quarter for a total cost of $52 million.

This brings our total repurchases to 14.9 million shares or approximately $900 million, and represents more than 11% of the balance of fully diluted shares outstanding when we authorize the original repurchase program in July of 2005.

As of June 30, 5.8 million shares remained available for repurchase, under the current authorization.

Turning to our outlook, we expect another excellent quarter with continued earnings improvement as price increases implemented during the second quarter and in the third quarter are expected to improve average realized prices for each of our reportable segments.

For flat-rolled third quarter results are expected to improve substantially from the second quarter.

Reflecting continued realization of price increases.

Raw steel capability utilization and shipments are expected to remain near the second quarter level.

And raw materials costs are expected to increase.

Third quarter results are expected to decrease for U.S.

steel Europe.

While averaged realize prices should be higher, raw material costs are also expected to increase.

And shipments and operating costs could be negatively affected by a planned blast furnace realign at U.S.

Steel Cochiza that is scheduled to begin shortly and continue into the fourth quarter.

Third quarter results for tubular are expected to increase significantly, as price increases continue to be realized.

Semi finished steel costs will increase and shipments are expected to be at about the second quarter level.

We are optimistic about our prospect over the longer term as our Company is well positioned from an operating and commercial standpoint.

Of course the continued health of global steel markets is dependent on larger economic trends and conditions.

That concludes our comments.

Nick?

Could you please queue the line for questions.

(OPERATOR INSTRUCTIONS) Our first question comes from Aldo Mazzaferro with Goldman Sachs, please go ahead.

Hey, John, how are you?

Hey, Aldo, we're doing great, thank you.

Good.

I wonder if you could talk about the effect of the global markets a little bit.

I can see how automotive production here is down a lot.

And I know you sell some to automotive.

What is the effect on your business when -- when say general motors cancels a contract and you get a chance to send it to another market.

What kind of impact would that have on margins?

Well, we have been experiencing some of that during the year, Aldo, as you can appreciate, just looking at the automotive build schedule.

There is not too much cancellation of the contract as there are lesser volumes taken on certain products than there might have been in our original plans.

So far we have been able to -- not just in automotive but in some other markets as well we have been able to move that product from -- those contract oriented markets, which -- which include prices that date from last year.

Into more spot markets, in some cases export markets and those are at price levels that would be representative of what you see in the various indices.

That has been a net positive for our average realized prices for the year and certainly was in the second quarter as well.

John speaking of that contract pricing, your -- your average selling price is still below the hot rolled coil price.

Can you mention more or less what impact the roll over of some of those surcharges, how much of your contract business does that effect the surcharge rollover and what -- and you mentioned you had some renewals of contracts that happened mid-year?

We did.

We -- several different pieces there I guess it -- let's take them one by one.

As I mentioned we have implemented some price increases on existing contracts.

And, some of that was in the second quarter but more will be in the third and fourth quarters.

There are other contracts that are index related and those have been affected by the indexes as the time has gone on.

But there is a good bit of our contract business that has not been affected and that's sort of an 8 million tons per year contract on our normal 50/50 blend.

Maybe a little bit less this year because of the lower volumes on certain customer groups but the majority evidence that will be subject to renegotiation by the end of this year.

So 5 to 6 million-tons I would guess, somewhere in that range.

Then the remainder will be subject to negotiation in the earlier part of next year.

By mid-next year virtually all of that would have had a chance to be addressed again and we will go through that process.

I don't want to do it in this forum but you can judge where the price indices were when those contracts were arrived at last year and you can judge where they are today and get some appreciation for what opportunity there might be.

And I guess on the last piece I missed was, the some contracts by their terms were up for renewal during this period and those were reestablished at prices that are more representative of what was in the market at the time.

That's great.

John, just finally the truest test of Nick's performance as an IR guy is the performance of the stock.

And it has been okay during his tenure.

Thanks Aldo.

Our next question is from John Hill with Citigroup.

Yes, good afternoon.

And congratulations on a great result.

Thank you, John.

Just again looking at the North American flat-rolled margin margins EBIT per ton, $99 million.

Those appear to be up strongly from the second half of '07, but those numbers themselves were depressed by Stelco.

One could argue that normalized basis we're only up $40 to $50.

I mean, order of magnitude do you think we can tack on another $100 or more in terms of EBIT per ton in the U.S.

flat-rolled system over time?

I haven't done the calculation you just did there.

I think in the last year comparative numbers Stelco wasn't in until the latter part of the year and we just had the one -- really just the two months effect there and they weren't the best two months, so I think the -- what we're seeing is market expansion as we continue to move more and more volumes to the current price levels while costs are increasing they are increasing at lower levels and there is continued margin expansion yet to come as we see continued price improvement through both the continued realization of spot price increases that were implemented throughout the first half of the year including the bigger ones during the second quarter.

And then we had a spot price increase in July.

Another one in September so we will begin to see the realization of all those as well as some of the contract adjustments and -- so I am not sure I am going to give you a crisp answer except to say we seen the improvement in profitability in our North America flat roll segment.

And on the topic of Stelco, obviously some very strong production numbers coming out of there and you talked about the U.S.

slab caster and set foot what have been the source of the pleasant surprises at Stelco and what have you learned through that process?

I think it has been the fact that the -- the equipment and facilities, are as good as we thought they were.

The employees at all levels are as good as we thought they were.

And with some leadership, and management, and taking away some of the barriers we're able to run the facilities at much higher levels and more consistently that they have ever run before.

I just think it is a great performance by everyone at every level in the Company in Canada and also with a lot of support from our headquarters groups at every level at the furnaces, coke plants the steel shops and at the Oxford mill.

All the facilities are running extremely well and the market has been pretty positive for us right now, too.

The fact we have a long slab position and slabs in a good place which we're getting great results from and the strip mill at Lake Erie is running extremely well and it is an excellent product and we wish we could make more.

It has just been a good result.

The facilities are doing what we thought they could do and the people have responded extremely well.

Great job.

Nice to see numbers come through there as well as on Tubular, recalling all the skepticism at the time that deal was done, great numbers so great job.

Thank you and our next question is from David Lipschitz with Merrill Lynch.

Thanks.

Quick question on your coking coal.

There has been talk from coal companies about international players coming to the U.S.

to talk about coke and coal earlier than normal have you heard about this?

Have you started looking at deals earlier than you normally would?

In terms of our supply arrangements?

Yes.

Exactly.

Not really.

The influence of other parties is always there.

We tend to have a continuing dialogue with our customers as we continue to move our positions out forward.

And we have done that, and our position for 2008 is, -- taken care of.

We have a decent position already established in 2009.

I would say more than half of what our North American requirements would be and a not insignificant position, less than half but significant position for 2010 already as well.

Price positions not just volume positions.

So, we have had continued success because we work with a pretty good group of coal suppliers we think and we see that as a stable situation at this point.

Undoubtedly prices have gone up.

We will get our share of that over time but for the moment we're in pretty good shape.

Just to follow-up a bunch of your competitors have been buying coke and coal mines here in the United States.

I know you used to and have sold it off.

Is that something you want to get back into if the right opportunity presented itself?

I am not sure how many have actually done that yet but there have certainly been a lot of reports about it.

You're more expert about that than I am I suppose.

Probably not as a direct owner and the operator.

That's a -- underground mining we think is a risky business best performed by those that are prepared to take that risk and get paid for it but having said that, perhaps an equity position of some kind which is the same kind of thought we brought to that in Europe, might be something worth exploring but that's just conceptual at this point.

Okay, thanks.

Thank you.

Our next question comes from Brett Levy with Jefferies and Company.

Hey, guys.

As you look at all the various things that you see in terms of rising raw material costs, and your strong balance sheet right now, is there any particular area where you think it would be attractive to start backward integrating kind of beyond what you have already achieved?

Just the things I think we talked about before, Brett on the North American side.

Perhaps in a modest way that the coal-related matter that was just discussed by the last question, but in Europe, we have spoken on and off about wanting to have a, potentially an equity position and some iron resource that would give us some stability in our cost picture, we continue to have many discussions with many parties about that, and we have never gotten the ball across the goal line yet but we continue to see that as an aspiration.

Whether it happens or not it's impossible to say at this point but we think that would be a good thing to do.

That was my only question, thanks guys.

Thank you very much.

Thank you.

Our next question comes from Timna Tanners with UBS.

I just wanted to ask you a little bit about the balance sheets particularly the working capital consumption, we appreciate obviously higher costs and higher realized prices.

But the days outstanding for receivables still has not tipped 56 from 48.

Are you at all concerned about some of your customers in light of what we know about the auto industry or appliance industry and collecting on that?

I know Gretchen referred to it in her comments but if you have any further color on working capital this quarter?

Timna, I think that we're very comfortable with the receivables position that we have.

I mean we monitor -- I don't want to comment about any specific customers or not but we have a -- system of credit and extension that we try to establish and live by with -- on a customer by customer basis.

What we're comfortable with, and -- try and stay on top of that.

So I would say we're very comfortable with our receivables position.

Okay.

And then going to the outages for the rest of the year you highlight the blast furnace in (inaudible) but that's one blast furnace out of five.

Can you give us any information on the size of that furnace and any other outages you're seeing across your production?

The one in slovakia is one of three -- one of five in Europe you correctly point out.

I think it is making probably around 3,000 a day.

Probably less than that.

More like 2500 tons per day so over 90 days it is 300,000 tons plus or minus.

This will be 60 days in the upcoming quarter and then 30 days according to the schedule we will start in the next few days so, you could take a look at what our profitability per ton was and use those numbers and come up with some kind of a ballpark for the -- the lost volume and what the -- the income impact might be there.

And then there is direct cost with that that would be incremental which would be about probably the same amount as what the volume impact would be.

So that's just a ballpark for you.

That's the only thing in Europe of consequence.

Lots of small things that happen routinely.

In North America really nothing planned at all in North America in the third quarter of any consequence.

Small routine things.

We had do have a couple of things we need to do in the U.S.

market, the U.S.

furnaces in the fourth quarter, there is a couple of weeks outage at our Mon Valley works, nothing to do with the blast furnaces but on our caster there is a certain bearing on the turret that needs to get replaced every once in awhile.

This is the once in awhile right now.

We have been planning for it quite awhile.

It will be a few weeks down, the furnace will be banked and we will be back up in a couple weeks.

We will lose a couple hundred thousand tons plus or minus there probably.

And then smaller jobs in Granite City.

One or two in Garry.

Small items in total, couple hundred thousand tons.

That is just routine stuff we hadn't planned.

They have been planned.

But they will happen routinely but that's about it.

Nothing big.

Finally, if I could ask your export opportunities that you might be seeing.

You're not as well positioned maybe geographically as some of your competitors but how do you see your export opportunities?

We're pretty well positioned in Canada and it's been one of the real positives there as well.

Export opportunities are there and we have been exporting in the second quarter, we always export of course some material to both Canada and Mexico routinely but we would view -- your question I take it is more non traditional non NAFTA kind of exports.

In the second quarter we did slab as well as mostly hot band.

A few hundred thousand tons and we will do at least that much, probably a little bit more maybe in total up to 400,000 or 500,000 tons at the maximum I had would think at this point in the third quarter.

But we have been able to reach a decent logistics position with our Canadian position.

And we have slabs that are going into export markets and also into non flat-rolled markets that would be a little closer to home that doesn't affect our flat-roll business.

We have been able to take advantage of the strong global demand, and we have sent our hot-rolled product to a lot of places that I never thought we would be shipping to.

Okay good, thanks.

Thank you.

Thank you, and our next question comes from Michael Gambardella with JPMorgan.

Yes, good afternoon John.

Hey, Mike.

Congratulations would be an understatement.

But great work.

Thank you, our folks did a good job, thank you.

I have a question for you.

On this -- automotive question you get a lot.

If you had some tonnage, under an auto contract that you had signed at the beginning of the year, and -- the auto customer came back to you and said we don't need as much tonnage as we thought how much more money would you make on those tons putting them either into the export market even as a slab or just in the spot market?

Well, it depends on the -- the price and the customer and where we would divert it to but it would be in the hundreds of dollars per ton difference probably, again just looking at the hot roll reference price that was in the market when those contracts were set in the third quarter, I would guess of last year, early fourth quarter.

Which was -- I am remembering 500 plus or minus and you look at the spot market today which is $1000 or plus, that probably gives you a pretty decent bracket on what the kind of numbers are we're looking at.

The point here is on automotive weakness and demand you're actually making more money by diverting it to a higher-piece priced market?

I think that is a reasonable conclusion.

And then second question.

On the tubular business, can you give us an idea of how much of the $800 price increase that you announced for July 1, you effectively have gotten already in this second quarter by getting some of the price adjustments, that $250 that would be kind of a deduction tradition the 800.

I would say a decent piece of it but no more than the 250.

So it is probably at least that amount and there was some we didn't get the 250 on for one reason or another.

There is a pretty good opportunity there for a much higher proceed in the third quarter.

Okay great, thank you very much.

Thank you our next question comes from John Tumazos.

Please state your company.

Congratulations again you earned a couple good years in the last three months.

Thank you, John.

Two questions, first, could you describe the opportunities to increase your land position -- and I know your reserves already are great, in Minnesota.

But the geologic structure is much bigger than the ground you own.

Or even take it public, a few percent of it to focus the markets attention on the value of that franchise.

And second question, given all the gyrations in coal and scrap and iron ore and product prices, going forward, will your structure -- your strategy to have less contracts, for inputs and products, to be able to adapt to change or as the world gets more volatile, how -- how do you plan going forward?

That's both good questions John.

On the first point just on the iron resource development prospects.

We do have a variety of land positions and opportunities to -- to perhaps increase those through lease or outright purchase land positions.

And we're working on those all the time as we develop our mining plans at both Keytack and mid-tack and now indirectly through some of the equity interests that we own.

But at the moment I think the limiting factor is more just a time of permitting and we understand that we need to do permitting.

We understand it takes time but the gating factor for us on the expansion we have at (inaudible) which will be several million o tons by restarting an idle line is really governed more by the permitting process and we are underway there and we have a target date for September of next year or something like that.

That will likely be the thing that would perhaps slow us down or provide some temper to how quickly we can do that versus having additional resource to develop.

I think we have sufficient resource, and I think we're confident we can could keep a sufficient resource in front of -- in front of the mines.

In terms of different financial techniques, we have looked at a lot of things over the years.

John, and have stayed with the current position.

I think to focus the markets attention on the value, our resource position, I would just direct them to look at our income per ton of our flat-rolled segment for this quarter and to maybe keep looking at it for the next few quarters because I think that we're going to begin to see what we saw in the second quarter, some pretty good results where margins can expand because our costs won't increase perhaps as much as some others have.

So I would say, I think that is going to be helpful to achieve the end that your question implies.

On how to deal with input costs, it is a very turbulent period, and we're looking at how to deal with inputs and I think there, we tend to be moderate.

And have some balance, between shorter term purchase commitments and longer term to provide some stability, but not getting locked into a particular risk that is way behind or way in front of the market.

So I think we would continue there to be moderate and balanced as we have been, but also, looking forward into the customers, as we get into establishing new contract terms, really right about now, I don't want to get into too much of this because we're doing it right now but I think the time of the fixed price contract into our customers might begin to change.

And there will begin to be some degree of ability to manage that relationship in a more flexible way for the benefit of both us and our customers over time.

I think the overall allocation of value from the supply chain to the mine pit all the way to the end use application is being reconsidered right now.

I have no doubt that with both of our good suppliers and good customers that the customers will come to a good solution of that but I think that is really the question and we're working on both ends of that right now, with some success but we will to have -- have to wait and see how it works out.

John, if I could follow-up, there is the Minnesota Steel and the Steel Dynamics Mesabi Nugget steel and iron making projects.

In the taconite range.

Given the extraordinary $375 premium for clean scrap today, one would think that you could make iron two-thirds of that cost if you wanted to up in Minnesota.

And sell it for a wonderful profit.

Do you have any thoughts about merchant iron making, and could be a better business than those folks that want to build glass furnaces in the swamp in Louisiana?

I am not too up-to-date on the latter item so I will let that one go but just in general, John, again from our standpoint we think the highest value we can create ultimately for our shareholders is to develop our resource base as quickly as we can consistent with good environmental principles and convert that in our Midwest blast furnaces and get it into an undersupplied market at a high margin.

That that captures not just the resource value but also the conversion value including the iron-making value, and that is going to be valued against scrap-based material so we are going to get that value.

We think that is the best way to go.

Actually getting into some new iron-making activity, in and around the range, would bring other permitting issues with it, but I think we're best addressing the ones we know how to work on now.

But it is a good question.

And our next question comes from Mark Parr with KeyBanc Capital.

Hey, thanks very much.

Hi, Mark.

How are you this afternoon.

You have had better days but not very many?

It is a pretty successful quarter, thank you.

Congratulations.

Really.

Absolutely very successful.

I was wondering if -- John, and I don't know if you have addressed this.

Could you comment a little bit on how much progress you're making with the -- with the spot price increase announcements that the trade press has talked about for September?

I didn't address it directly but we did have -- we don't necessarily do announcements but we inform our customers and that find its way into the press I suppose.

We did intend to move our spot pricing by $40 a ton in general, in September.

And that is working its way through the system.

We don't try things out for size.

We do things when we think it is the right thing to do and the market will sustain it and we think it has to some degree and it will.

All right.

Is there any corresponding upside opportunity in Europe?

Could be.

There were some recent price moves, that are just being digested and I think we're in a period of hiatus here.

This is traditionally a fairly slow time in Europe as you -- I am sure you do know.

So I think that will be probably a subject more for September discussion than right now.

Okay.

And that -- one last question.

On the slab situation, that you talked about, related to your export opportunity, is there any reason to think that the pricing that you're getting for slabs is any different than what we're hearing about being quoted FOB Black Sea?

No, I am assuming you convert for metric and can do those sort of things.

Sure.

No, those are generally the kind of prices we're seeing.

Okay terrific.

Well, hey, can't wait for the next quarter that's all I can say.

Well, we have a lot of steel to make and a lot of orders the take but we think it should be a reasonably successful quarter.

I certainly hope so.

Look forward to it.

Thanks again.

Thank you.

Our next question comes from Michael Willemse with CIBC World Markets.

John, earlier you talked about your met coal evaluations for 2009.

Do you have any sense now on how much the increases could be on some of your longer term met coal contracts?

Are we talking -- let's say some of your ones that run a few years.

Are we looking at, $10, $20 a ton or -- do a lot of your contracts get renewed at the end of 2008?

Well, some will get dealt with at the end of the year, or between now and the end of the year and we have about half or so already in for next year, at prices we're comfortable with and presumably our suppliers are as well.

Undoubtedly the prices that are in the marketplace today are much higher than they were at this time last year so I am sure we will be facing some increases, but, it is really too early for me to say whether the numbers you mentioned would be the kinds of increases but that could very well be the case.

I don't think that we're necessarily going to experience some of the really headline prices that the sea borne numbers had on them just a few months ago.

I don't think that will necessarily be the case but it is a little early to say.

I am reluctant to negotiate that at this point but my guess is it would be more like the numbers you talked about.

Okay.

Also, could you give us a sense of how much your North America shipments were slab in the second quarter?

Oh, I am going to guess it was 100,000, plus or minus, somewhere in that range.

Okay so is that a good number to kind of think about going forward?

It probably will be a little bit more than that I would think we're -- we're making a lot more now and we have some customers who find them very desirable so we are going to try and make sure we serve their interests.

I would just say the sum of slab and export non traditional, non NAFTA export if it was 200,000 to $300,000 it is probably going to be more like 400,000 to $500,000.

Sort of in that order of magnitude.

And then just one more question on the U.S.

Steel Canada, when you purchased Stelco I think you commented on the capacity there being about 5 million tons.

Do you still think it is 5 million tons or do you think it might be more?

It could be more.

We're asking ourselves some of those questions right now.

It is really too early to reach any conclusions on that.

I think we will have to let the facilities run for awhile and some of the things that go into that are involving outages and what your ordinary annualized capacity would be.

So I think it is possible but it is going to take a little while to figure that out.

Okay great thanks very much.

Thank you.

Our next question comes from Bob Richard with Longbow Research.

Your line is open.

Thanks for taking our call.

Thanks Bob.

Not to beat Stelco to death but the utilization is pretty impressive.

Can you give some flavor, was that a mix change, more inner Company, more slabs -- is a lot of that going to trade?

Whatever detail you could give would be appreciated.

No, it wasn't necessarily mix.

I think the mix is largely as it was.

We did a lot of work to refine the mix but it is just the people running the facilities more consistently at higher levels than they might have thought was possible and we knew was possible.

So I would say it is just an excellent effort by the employees, good direction by the management.

We had some technical assistance that allowed us to improve the burdens, maybe change some of the technology and tweak it a bit but we always knew we can take it away.

It is just a matter of making the iron and making the steel and getting the supply chains where they could supply all the things we need all the time.

We just worked our way through that and had the logistics supporting all that to take it out.

I would just say it was a great effort by the entire team and once they knew what they could do, they set about doing it.

So just a good effort by the team.

No sort of magic discovery, we didn't uncover a furnace we didn't know was there, just running the things that were there at the levels we thought we could do it.

Is it a correct assumption to say most of your inner Company comes out of Stelco?

You mean inner Company transfers to Tubular for example?

Yes, slabs and hot band.

No, the hot band that we're sending to our Tubular operations would be primarily Granite City.

Not exclusively but primarily Granite City.

Some of that could potentially be coming from Great Lakes, some of that could theoretically be coming out of Hamilton slabs, it is not a steady diet but we have done all those things.

All the trade slab sales or virtually all that comes out of Hamilton is because of the way we're configured.

But the way we really have things laid out now we have got this nice steady demand in Texas.

With the two mills and we run everything back up.

But originally the excess steel is going to come out in Hamilton and that is teed up then to either get it finished in Great Lakes or Granite City or Lake Erie if we have the extra space or sell it as a slab.

For today's market it is a pretty good configuration.

I appreciate all the color.

One quick follow-up.

Utilization in Tubular pretty impressive.

Any concern on imports have gone straight up 45-degree trend here since the beginning of the year.

Any concern on you pricing increases having traction in that environment?

In order yes and no.

I think yes we're concerned about imports, we always are.

Not if they are fairly traded imports then let the best pipe win.

But when they are coming from places in particular, China, we all know everyone on this call and everyone in the world knows has one of the highest cost structures in the world selling their product in our market at prices well below their cost is against the rules.

And when we see that happening we draw that to the appropriate authorities' attention.

We do have a line pipe case going on right now there were two other import cases that have had some success with the ITC.

So are we concerned yes, is it affecting the overall business and our ability to generate the kind of margins that we think we can, not in a big way right now.

Okay thanks very much and great quarter.

And our next question comes from Wayne Atwell with Pontis Capital Management.

Thank you.

And at the risk of being redundant, congratulations on a great quarter.

Thank you, Wayne.

The steel market is probably the best it has been in 30 or 40 years.

You had a great quarter and you're likely to have a pretty good next one to two years with a lot of cash flow.

You have bought some companies and, built some facilities, you are working on coke but -- taking a look at your -- at your income and what you spent on your share repurchase program, you're going to have a lot of surplus cash over the next one or two years.

Can you sort of -- I can figure out just like everybody else what you might spend it on but can you give us a list by priority, share buy back, acquisition, asset accumulation, how are you going to spend your money, and could you do that by a most exciting to least exciting?

Sure.

I will let Gretchen comment.

That isn't usually the parameters we use but we will try to do it that way.

In general I would say that in the future we would be doing things the way we have done them in the past.

If you look at our recent record we would run on that record.

That's the way we will tend to operate, and the things we have done will be indicative of what we will likely do in the future and we would do it responsibly and balanced, not to extremes in a way that tends to favor shareholders values.

With those parameters Gretchen go right ahead and comment.

Yes, and I guess from the most favorite to the -- most exciting to least exciting, that probably changes over time.

And I think that the approach that we have tried to take, reflects that.

And so, we think about it all the time.

And what we should be doing about using excess cash flow.

So, we do have significant capital opportunities, which we're pursuing that will also help address some of the risks that we have identified, in our business, on the coke side for example.

And so, you can expect that we will be spending higher capital as a result of that.

You know we -- we have done a pretty good job with our balance sheet but there is probably a little bit more that we could be doing there.

As we generate cash flow we do have the flexibility to reduce some of the debt that we have.

We can get our hands on it pretty easily.

We have been funding our employee obligations very steadily.

I think I am pretty comfortable with what we have been doing there and, don't see huge changes, with our approach.

But, we could have some opportunities where it might be very tax efficient thing to do to fund some additional amounts and we'd consider that.

But then that gets us back to dividends.

And I think we gave you an answer today on our dividend and increased it for the second time this year.

And then we have been continuing our share repurchase program.

And I -- I'd just say that we would do more of the same, and we with do more where we think that we have to do more.

And I think just to finish on that, we do have some things internally, with internal capital, that I think qualifies as exciting being able to develop additional 3 million to 4 million to 5 million tons of resources and iron work pellets per year coming out of our equity operations and into our blast furnaces for conversion.

Those are exciting things, I think we have resource value and conversion value into a pretty good world market.

We think that is pretty exciting and can create a lot of value.

It is a ways out but we think it is exciting.

Just one last question as a follow-up.

You have done a great job of buying when other people weren't interested and gotten some great values in Europe and elsewhere.

And obviously you can't mention any names but one would guess, knowing what is available and what has been bought there aren't as many exciting opportunities like you found in Europe and up north of the border.

Are you finding -- and obviously you candle mention names but are you finding interesting acquisition targets like you have in the past?

Well, I mean you're quite right.

Most of the good countries have been discovered so -- I think the likelihood of us developing another opportunity like we had in Slovakia is quite unlikely in the near term but we do have a lot of things that we're looking at in terms of development in each of our business units that could add real value.

Some smaller some larger.

On the Tubular sector I think we have opportunities there to improve our business by adding elements to it that may not be there now.

I think we have a lot of opportunities but it is a different world today than it was back in 2002 and 2003.

There is no doubt about that.

I think you're quite right.

Thanks keep up the good work.

Thank you.

Thank you we do have time for one more question, and that goes to David Martin with Deustche Bank.

Your line is open.

Thank you.

I just had a couple remaining items.

First one is a clarification, John, I think earlier in the Q&A you mentioned 5 million to 6 million tons of contract business.

Was this fixed price contracts that can't reset until '09?

Yes, it is -- that number was I think related to contracts that are currently in place that will likely be adjusted and renegotiated and reset for business effective 1/1/09.

And then secondly focusing on Europe.

Can you quantify or give us some estimate of what additional cost increases you will see in the third quarter on a per ton basis?

In the second quarter, I think costs were up maybe $100 a ton.

I would have thought they would have been up a bit more than that.

I guess what I am asking is what additional cost increases will you see from what we have seen going on with global prices for both iron ore and coal?

Sure I think there will be continued steady increases.

And I -- I guess my number looks similar to that.

I am just looking to make sure I have the right number.

Probably similar to that but in the third quarter it will look a little bit different because we will have fewer tons because of the glass furnace outage we mentioned and some direct costs related to the outage so it will appear to be a higher cost increase in the third quarter than the second quarter.

But other than that I think it is fairly steady cost increases like everybody else has.

Okay.

Thank you much.

Okay, thank you.

Thank you, there are no further questions.

If you have any closing remarks.

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