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United States Steel Corp. (NYSE:X)

Q3 2007 Earnings Call

October 30, 2007 2:00 pm ET

Executives

Nick Harper - Manager of Investor Relations

John Surma - Chairman and Chief Executive Officer

Gretchen Haggerty - Executive Vice-President and Chief Financial Officer

Analysts

Kuni Chen - Banc of America Securities

David Gagliano - Credit Suisse

John Hill - Citigroup Global Markets

Christopher Olin - Cleveland Research Company

Timna Tanners - UBS

Brett Leavy - Jefferies

Mark Parr - Keybanc Capital Markets

Aldo Mazzaferro - Goldman Sachs

Michelle Applebaum - Applebaum Research

John Tumazos - John Tumazos Independent Research

Michael Willemse - CIBC

Dave Martin - Deutsche Bank

Marty Pollack - NWQ Investment Management

Bob Richard - Longbow Research

Operator

Ladies and gentlemen, thank you for standing by and welcome to United States Steel Corporation’s third quarter 2007 earnings conference call and webcast. (Operator Instructions). I would now like to turn the conference over to Manager of Investor Relations, Nick Harper. Please go ahead, sir.

Nick Harper

Thank you, Gail. Good afternoon and thank you, everyone, for participating in United States Steel Corporation’s third quarter 2007 earnings conference call and webcast. We’ll start the call with some brief introductory remarks from US Steel Chairman and CEO John Surma. Next, I will provide some additional details for the third quarter. And then Gretchen Haggerty, US Steel Executive Vice-President and CFO, will comment on the outlook for the fourth 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 recent annual report on Form 10K and updated in our quarterly reports on Form 10Q in accordance with the Safe Harbour Provisions.

Now, to begin the call here is US Steel Chairman and CEO John Surma.

John Surma

Thanks, Nick. Good afternoon, everyone. Thanks for joining us. Earlier today, as you probably saw, we reported solid third quarter results with earnings of $2.27 per diluted share, which includes a $27 million pre-tax charge related to inventory acquired from Lone Star and discrete tax charges totalling $11 million. You may recall that we discussed the potential inventory charge on last quarter’s call. Excluding those items, if you care to, which reduced that income by $28 million or $0.23 per share, our results were $2.50 per diluted share.

From an operating perspective we’ve reported third quarter segment income of $433 million or $78 per tonne. A good performance, especially given the market challenges experienced in each of our operating segments.

Our North American flat-rolled segment had a very good quarter with operating income of $178 million, ordinarily $50 per tonne, almost double what flat-rolled earned last quarter.

Our key markets were generally stable during the quarter and remain so today. And steel market fundamentals are generally positive. Service centre inventories and flat-rolled imports have continued to decline throughout the year and are currently at relatively low levels. Very high ocean freight rates, the relatively weak US dollar, high scrap prices, and the prospects for a significant increase in the seaborne iron-ore price has us cautiously optimistic that the North American flat-rolled market could be poised for some improvement. The North American economic outlook, of course, will be a factor in when that may occur.

These favourable trends strengthen our optimism for the longer term, particularly since the weaker US currency should continue to discourage imports and favour many of our steel consuming customers. Global raw material cost pressure only furthers our expectation for an eventual improvement in North American flat-rolled pricing.

We’re limited in what we can say about our pending Stelco acquisition beyond the presentation and press releases made available on our investor website that summarize the transaction and a number of other public documents that have been filed recently regarding the various closing procedures. Both parties continue to work through the remaining closing conditions and we expect the transaction will close shortly, perhaps as early as tomorrow. Gretchen will describe our financing plans for that transaction in a moment.

The business case for the Stelco acquisition is very strong as the addition of the Stelco assets will allow us to expand our customer base in North America, increase production at our Minnesota ore operations, and expand our supply chain in providing semi-finished steel to our flat-rolled and tubular finishing facilities in the US.

The potential synergies are significant, especially as we better utilize and balance our low-cost raw materials, and our geographically dispersed raw steel and finishing facilities to serve an expanded North American customer base. We have teams in place working on integration process to ensure we can generate the more than $100 million of run rate (sic) synergies by the end of 2008.

Our third quarter European segment operating income of $152 million or nearly $105 per tonne continues our string of strong results. We did have higher raw material and outage costs and reduced shipments and production associated with blast furnace outages, including our Serbian blast furnace major rebuild project, and of course the normal European summer pause. The European market remains reasonably firm, especially in the central European quarter where we ship the majority of our product.

Unprecedented levels of flat-rolled imports, particularly from China, have resulted in higher than optimum customer inventory levels and some pressure on spot prices and order rates. You may have noticed just yesterday Eurofer, the European Steel Producers Association, initiated trade action against unfairly traded imports of hot-dipped galvanized product from China. We are members of Eurofer and we support this action.

Recently we had the formal dedication of our new automotive galvanizing line in Slovakia. As evidenced by the number of important customers, public officials, and other dignitaries in attendance, this project is a high profile investment in the region. I want to thank everyone involved for their hard work in bringing the new line to on-time completion. We look forward to increasing our participation with the automotive and appliance manufacturers in the region and to securing greater contract business volumes in 2008.

Also in Slovakia, we recently announced a voluntary early retirement program. Employees who elect this program will terminate their employment prior to the end of 2008. We anticipate the program will generate substantial future cost savings through long-term productivity improvements. We will not know the employee response to the program and the amount of the resulting fourth-quarter charge until later in the year.

Now turning to our tubular segment, excluding the inventory charge I mentioned earlier, we earned $74 million or $156 per tonne shipments on shipments of 473,000 tonnes. Shipments and costs increased during the quarter as continue to integrate the operations acquired from Lone Star into the US steel supply chain and establish our unified business model.

Average proceeds were lower as prices for energy market products trended lower and a larger share of our overall product mix was welded product, which is generally at a lower price than seamless.

Our tubular distributors continue to focus on inventory management during the quarter with high levels of inventory and imports, particularly from China, weighing on domestic shipments and prices.

With the Lone Star acquisition we’re now the largest supplier of OCTG product in North America. We’ve established a new distribution network with a limited number of authorized distributors and we are shifting to a made-to-order business model. The new distribution network could allow us and our customers to improve management of inventory and production across the business cycle, and it will also allow us to enhance our relationships with end users of our product.

The integration process is well under way and we are on phase to generate at least $100 million of annual run-rate synergies by the end of 2008. The primary source of the synergies will be semi-finished steel supply as we integrate the assets acquired from Lone Star into the US steel supply chain for hot-rolled product.

Additional benefits include leveraging procurement and best practices, and overhead reductions. Along these lines, in September we permanently closed the two small electric arc furnaces and rolling mills in East Texas. The full benefit to these actions will be recognized in 2008.

In summary, the third quarter was a very active and productive period for US Steel. With the Stelco acquisition, progress on the Lone Star integration, and the dedication of our new galvanizing line in Europe, we have taken major steps to improve each of our main business segments.

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

Nick Harper

Thank you, John. Capital spending, which is detailed by segment in the earnings release, totalled $210 million in the third quarter. Our current plan for 2007 has total capital spending at approximately $725 million with $521 million for North American operations and $205 million for European operations.

Depreciation, depletion, and amortization totalled $124 million in the third quarter and is expected to be about $475 million for the year, recognizing the increase related to Lone Star, but excluding any effects from Stelco.

The fine benefit and multi-employer pension and OPEC costs for the quarter totalled $64 million. We made cash payments of $91 million for benefits, primarily for retiree health care, during the third quarter. Also during the third quarter, we made a $70 million voluntary contribution to our main defined benefit pension plan bringing our year-to-date voluntary pension contribution to $140 million. Additional detail will be included on our 10Q, which should be filed later today.

Net interest and other financial costs totalled $22 million in the third quarter and we expect fourth quarter net interest expense to be about $20 million, which excludes foreign currency gains or losses and financing activities related to the Stelco acquisition.

Our estimated annual tax credit (sic) for 2007 will be determined based on domestic results taxed at the statutory rate of about 38% and Slovakian earnings taxed at a flat 9.5%. This rate in the first three quarters of 2007 was about 17%. During 2008 we expect to fully utilize the tax credit that has been available since we purchased USSK in 2000. This will result in a higher effective tax rate in 2008 and subsequent years. This matter is covered in more detail in our 10Q.

Lastly for the quarter, we averaged 119 million fully diluted outstanding shares. Now Gretchen will review some additional information in the outlook for the fourth quarter.

Gretchen Haggerty

Thank you, Nick. Our cash flow’s been strong so far this year with cash flow provided by operating activities of $1.354 billion. Excluding the Lone Star acquisition, our free cash flow after capital spending and dividends, but before external financing, was $852 million. We ended the quarter with $1.4 billion of cash and about $2.8 billion of total liquidity.

As we’ve mentioned before, of course, we continue to accrue profit-based liability to be used to assist National Steel retirees with health care costs that have not yet been paid because the trust has not yet been established. As of the end of the third quarter the accrued liability for this was $462 million, including interest.

As Nick mentioned earlier, during the third quarter we voluntarily contributed another $70 million to our main pension plan bringing our year-to-date total to $140 million, which is what we had forecast for the entire year. In addition, upon closing the Stelco acquisition, we have committed to make a pension contribution of $32.5 million Canadian to the main Stelco pension plan. Since the beginning of 2004 we have voluntarily contributed $865 million to US Steels domestic benefits plan.

As noted in the earnings release, we repurchased 285,000 shares of common stock in the third quarter for a total cost of $28 million. This brings our total repurchased to 14 million shares or approximately $750 million and represents more than 10% of the balance of fully diluted shares outstanding when we authorized the original repurchase program in July of 2005. We have 7 million shares remaining for repurchase under the current authorization.

As discussed in our Stelco conference call, we intend to finance the Stelco acquisition through a combination of cash on hand and utilization of certain existing liquidity facilities. In preparation for the closing we have drawn $400 million on our receivables purchase agreement, as well as $900 million under two new syndicated credit facilities; a $400 million one-year term loan and a $500 million three-year amortizing term facility. We may access the debt capital markets to refund a portion of these facilities. At closing, we intend to retire the majority of Stelco’s outstanding debt; a $150 million Canadian dollar note from the Province of Ontario will remain outstanding.

Turning to our outlook, for the fourth quarter we expect a decline in overall results mainly due to normal seasonal affects and several scheduled blast furnace outages. The planned blast furnace outages in both United States and Europe will impact shipment levels and costs. Results for Stelco will be included in our flat-rolled segment as of the date of the acquisition and our fourth quarter outlook does not reflect the effect of including the Stelco operation.

In the flat-rolled segment we expect results to be decline in the fourth quarter due primarily to lower shipments and higher raw material outage and modernization-related costs. Average realized prices are expected to remain in line with the third quarter.

For US Steel Europe we expect fourth quarter European results to decrease. Prices in shipments are expected to remain comparable to the third quarter level and costs are expected to increase slightly. We have two planned blast furnace outages that will continue to limit raw steel production.

Fourth quarter results for tubular are expected to be consistent with third quarter results as the benefit of higher prices and lower cost are expected to be off-set by lower shipments, reflecting continued high inventory levels and year-end seasonal sets. Nick.

Nick Harper

Gail, could you please cue the line for questions?

Question-and-Answer Session

Operator

Certainly. (Operator Instructions) Our first question will come from Kuni Chen with Banc of America Securities. Please go ahead.

Kuni Chen – Banc of America Securities

Hi, good morning, everyone.

All

Hi, Kuni.

Kuni Chen – Banc of America Securities

Hey, John, just had a question for you on Europe. The market’s obviously going through some inventory destocking. How long do you think it takes for the European market to get back to equilibrium as that of, you know, one to two quarter type issue or do you think it takes longer than that? And can you also talk about some of the mix shifts that you’re seeing in your business over in Europe?

John Surma

Sure. I’ll take the latter one first. The overall mix has been relatively constant. It just depends on what facilities we’re doing work on. Serbia would be our heaviest sort of spot market, hot-rolled business that’s been of necessity a little bit lighter just because we haven’t made as much metal there in the last month or two or three because of the blast furnace outages. So I think in general the mix has been relatively constant subject to just facility changes.

And then with the new galvanizing line coming up, of course that’ll begin to move more of our business to (a) to coated and (b) to contract, but that’ll take place gradually over probably a few years time, quarter by quarter.

On the overall outlook, it’s hard to say. I’ve observed over the last couple of years that the European market perhaps follows a somewhat delayed pattern of what we see in the North American market that maybe is playing out here again. The North American market is in a position where inventories have been drawn down to a relatively low level and now we’re just sort of moving into that phase perhaps in Europe. My guess is that it could be probably a quarter or two before we move back into a somewhat stronger position in Europe. But the underlying consumption still looks quite good, particularly where we are in central and moving toward the east. The seal consuming economies there are quite strong for infrastructure, housing and then eventually for a more consumer oriented kind of a book. So my sense is that it’s a little ways out, but not very, very far away.

Kuni Chen – Banc of America Securities

Okay, great. That’s helpful. And then one quick follow up, if I may, probably for Gretchen or Nick. Just on the outages in the fourth quarter, can you quantify either in tonnes or days production what that means in the US and in Europe.

Nick Harper

Let me just give you a couple of general comments. I think as the outlook said, I think our shipment level in Europe in the fourth quarter we expect to be about the same. We had some outage production effects in the third quarter and we’ll have some in the fourth quarter. I don’t know that we see a significant difference between the two. Gretchen, I’ll let you add on to that.

Gretchen Haggerty

Yeah. I mean, I think on the flat-rolled side we were looking at maybe $10 to $20 million additional outages.

Nick Harper

In the US.

Gretchen Haggerty

In the US on flat-rolled. As far as, you know, there’ll be a bit more in tubular, but not at that kind of a level. And then on the European side, you know, maybe about the same as the third quarter when you get it all said and done. There’s not a significant change from what we’ve got in the third quarter.

Nick Harper

Yeah, I think in the US we have on the blast furnace side three outages scheduled and these are all scheduled for a variety of reasons. None of major duration. They’re all, you know, one, two, three week kind of projects. At least, that’s how they’re planned. Sometimes they’re longer, sometimes they’re shorter, but I think the number Gretchen gave you on a direct-cost basis, 10 to 20 for North America is probably not a bad number. In Europe I think relatively flat and tubular fairly small. The only difference I would say is in the US the extent that we have those direct costs, that’s one thing, but our overall capacity utilization, which was up and very beneficial in the third quarter might reflect down a bit in the fourth quarter.

Kuni Chen – Banc of America Securities

Okay. That’s very helpful. Thanks a lot guys.

John Surma

Thanks, Kuni.

Operator

And we’ll now go to Brett Leavy with Jeffrey and Company. Go ahead, please.

Brett Leavy – Jeffrey & Co.

Hey, guys. It seems at this point that it may be more attractive to build than to buy. Can you guys sort of comment on that premise and talk a little bit about what geographies and what product areas might be interesting to you going forward?

John Surma

Sure. I’ll try. I think if you’re calculating what build costs are and what implied market values are per tonne, that’s certainly a much closer calculation than it might have been five or six years ago. We acquired the national assets, I think, for less than $200 per tonne, if I recall, and certainly that placement cost is many times that. Today those numbers are probably a little bit closer. We haven’t been particularly tempted in that regard just yet, although we can see that North America might be due to (inaudible) because of some of the macro effects that I talked about.

I think in terms of regions, I mean, the higher steel consuming regions that will have increasing intensity are likely to be the more developing countries. Certainly Latin America with resource base is very attractive. Some of the CIS countries with resource base is very attractive. And naturally some of the growing Asian economies. But in terms of our direct dissipation grain field in that regard, I think for us that’s probably a little ways out. I think we’re more focused on the things we have or will shortly have with Stelco and trying to take advantage of what we see in North America as a very favourable long-term economic position here.

Brett Leavy – Jeffrey & Co.

And then can you talk about your outlook at this point? Obviously some of the iron-ore guys have kind of fired a shot across the bow and talked about 50% increases in iron-ore in the press. Obviously we won’t know for sure until it’s all negotiated in January. Can you talk about your outlook for some of the key raw material costs as you go into 2008? Iron-ore scrap, etcetera.

John Surma

Sure. Just to tick a few off, I think you all read the same thing as we do from a variety of sources about the seaborne iron-ore and all the signs, including very high spot prices out of India in particular into China suggest that there’s room for a pretty substantial increase where the big buyers in China and Asia and where the big sellers in Australia and Latin America come out on that, I really don’t know, but all the signs I think point to quite a healthy increase.

From a coal standpoint, seaborne coal looks like its maybe a little bit tight, but in our position in North American Coal and the Appalachian Basin I think the overall market looks reasonably well balanced. We’ll probably have a couple of dollars per tonne of increase. We’ve got most of that already taken care of contractually next year compared to this year. In Europe our coal situation likewise, I think, is in reasonable position, although there may be a slightly larger increase there.

To the extent anybody’s buying coke, and we do, both in Europe and North America I think the seaborne coke market, which is a fair market, is quite tight right now because of maybe not quite as much coke coming out of China. I think that’s a market which is likely to stay relatively tight. It’s ebbed and flowed the last few years, but right now it probably looks fairly tight. And then in our own book we see that for furnace additions, by that I mean molybdenum and ferromanganese and that entire group of additions, that’s been a fairly tight market as well and those probably should continue to tighten in the next year.

Operator

And we’ll go to David Gagliano with Credit Suisse. Please go ahead.

David Gagliano – Credit Suisse

Hi. My question is related to your annual auto contracts for 2008. There’s been a fair bit of commentary in the trade rags lately just regarding some early posturing out of Europe for 2008. And the indications seem to be pointing for the auto makers, sorry, the steel makers pushing for a 20% list in auto contractors while the auto makers are actually trying to limit it to a 10% list. So my questions are, is that in your view a reasonable starting point for your negotiations in Europe and in the US for 2008?

John Surma

Well, we’re in that process right now and working our way through that. Some completed and some not so yet. As you know, I don’t like to negotiate with important customers in this particular venue. But having said that, as I just went through the cost pressures which we have to contend with, and I think our expectation is we proceed in a discussion with an expectation that we want to maintain and if possible improve our margins in the face of that cost pressure, which there’s a variety of reports about how much that will be per tonne. Those kind of percentages you talked about seem to me to be not outlandish, but I don’t want to go into any specific details because we’re still in that process right now. But when it’s all said and done we would expect to see some improvement in our overall contract price book next year.

David Gagliano – Credit Suisse

Great. Thanks. That’s very helpful. And then just as a follow up, regarding the tubular business. First, I was just wondering about the magnitude of the expected volume decline in the fourth quarter.

And then secondly, if you could just share your thoughts with regards to how long you think it’ll take for the tubular inventory overhang to work its way through the system. Thanks very much.

John Surma

Sure. The overall picture, I think, in not just CTG, but also standard in line has been characterized by heavy imports and relatively high inventories. The underlying consumption has been pretty good with gas and oil prices where they are and the amount of drilling activity which one can observe, and the amount of line pipe activity for water and gas and all the things that also moves into our flat-rolled business. The underlying consumption is pretty good. The issue really is a full inventory pipeline, no pun intended, and a lot more imports than would like.

The imports from China are a particular concern. There’s a number of trade actions under way there, as you know, and maybe more to come. Just recently we might have observed just a slight bit of leveling in imports, including maybe some from China. There’s reports of perhaps additional export tax actions coming out of China. All that would be positive. We’re not counting on it, but it certainly would be positive.

All that means to us is that the underlying consumption is good, we’re going to gear our production to what our customers need, which is how we run our flat-rolled business, as you know. And if that means it’s through the end of this quarter into the early part of next year before things start to tighten up a little bit and get back to a more reasonable equilibrium, so be it. We’ll make what our customers need. Until then, I’ll let Gretchen comment on what the overall shipment effect might be.

Gretchen Haggerty

You know, I think just what we tried to say in our outlook was that we are expecting higher prices and lower costs to be offset by shipments. Depending on how those, you know, that could lead you to a little bit more neutral kind of quarter-to-quarter effect. I think as far as shipments go, you know, I don’t think we want to be predicting what they are. I think we just wanted to kind of guide you that we had some favourable things and some unfavourable things.

John Surma

Yeah, that would depend on, and this is a particular market where the lead times are very, very short, so I mean, we’re making our own view of what shipments would be. We’ve got it toward, being a little bit on the lighter side. But the key point is we’re going to make what our customers need and the longer that this inventory bulge takes to work off then the little lighter our shipments would be.

Gretchen Haggerty

And John, you might want to just talk a little bit about the, you know, moving to kind of a unified model and how we approach that because that is going to have a tendency on extending lead time somewhat for some of the customers that may have purchased from Lone Star before. It’s just a little different approach.

John Surma

Yeah, we are, as Gretchen points out, we’re going more to a made-to-order kind of system. We don’t like having a lot of pipe stacked and collecting inventory when we don’t really need to. I think Lone Star as a steel shore company with no supply, I understand they had a much longer supply line. Our supply line is much, much shorter and as we transition through that we have to take some inventory out of the system and as a result we may not be having to make as much in the near term. So those are a lot of different data points, but I think the conclusion would be it’ll take a little bit more time to work all the inventory down.

David Gagliano – Credit Suisse

Okay. Thanks very much.

Operator

And we’ll go to John Hill with Citi. Please go ahead.

John Hill – Citigroup Global Markets

Yes. Thanks, as always, for a very detailed conference call. It seems that observers in steel have been calling for some time for this tight supply chain to translate into better market conditions, lower imports on the flat-rolled side, service centers, etcetera. Now it seems that just because of the small matter of a global financial pandemic this has been pushed out several months. But I was just curious, for the record, do you see that these drivers are still in place? Do you believe that the recovery case for steel into early ’08 is intact? Or should we be thinking about there’s some darker clouds over that?

John Surma

John, I think you have to look a little bit at the overall economic outlook. As I said, our third quarter flat-rolled results, which are not a bad indication of how industrial activity was, were quite good considering the fact that the economy wasn’t exactly going gang crushes in the third quarter. The numbers are pretty clear, the overall service inventories are low. Getting down to the kind of levels that the last two low levels attained.

Imports have trended down and look to be continuing to do so, and that makes economic sense because of the freight rates and the overall dollars. So I think we’re set up to have a response in pricing and perhaps in restocking. But all of our customers, be they distributors or converters or OEMs, they’re all cautious because they’re not quite sure where the market’s going or the economy’s going either.

As soon as we see, and I hope we do see soon, some reasonable stability in the economy and maybe a slightly brighter outlook and whether that goes from consumer all the way back to industrial, then I think the factors are all in place to have a fairly decent response, which would be along the lines of the response we saw the last two or three cycles. But I would just take it back to some reasonable comfort about the overall economic outlook I think will translate into progress in this market pretty quickly.

John Hill – Citigroup Global Markets

Yeah. Great perspective, great perspective. And then perhaps a bit narrower question. Just on the subject of mill level inventories. We’ve seen in other corners of the steel world service centers inventories come down, but then suddenly mysterious mill level inventories surface and derail the story. Obviously there was some overhang, a US dealer with some pipe supposedly that was scrapped. That’s a different matter than the steel mills, but can you provide us some comfort that US Steel is making to order and thin on the ground?

John Surma

Yeah, we always do. And our inventories have actually been drawn down. Gretchen commented on all of the strong cash flow that’s come out of inventory and we continue to keep very, very tight control over that. We have no interest in making slab or band to put it on the ground and wait for someone to take it away. So from a mill flat-rolled standpoint in North America and in Europe our inventories are lower than they typically have been. I think the tubular situation, again, is adjusting what we acquired into the kind of more of a pull than a push methodology that we prefer to have and we intend to get there as soon as we can.

The product, the pipe you referred to, was really product that understandably might have been there under a different model. We don’t really think it’s the right product to have going out with our name on it, therefore we thought that not having it on the market was the better thing to do.

Operator

Now we go to Chris Olin with Cleveland Research. Please go ahead.

Christopher Olin – Cleveland Research Company

Hi, Jack. Tell me a little bit about what you’re seeing in terms of the Asian tubular quality coming in. I know there’s been some kind of press that there’s been some bad product being shipped into the country and whether or not that could drive a faster recovery in the market.

John Surma

Everything you read is true. The quality, I mean, a lot of it was on structural things that we might not be as much involved in, but we certainly observe. But even into standard line of SVTG (sic), I think that quality is spotty and questionable and not of a quality that we’re comfortable in putting into our supply chain to the important customers that we serve. And I would hope that the more discerning customers would take note of that and then that might give us a little bit of an assist. That of course implies that that gets all the way back to China and they stop sending it this way. I’d prefer that market forces would allow that to happen as opposed to other means, but that may well be what happens. But there’s no doubt that the quality of a lot of the product coming that way is not up to the standards that we would apply to ourselves.

Christopher Olin – Cleveland Research Company

But you’re not seeing any kind of change in shares since this began to develop?

John Surma

Well, you know, this hasn’t been all that long. I think these kind of trends take a little bit longer to play out. So I’m reluctant to say we see a trend or anything else. I mean, all we’re talking about here is really episodic comments that we pick up in the trade, but not long enough now to really see a trend.

Christopher Olin – Cleveland Research Company

Okay. Just one more question. Considering you had to destroy some product at the Lone Star facilities, were there any, I guess, higher than usual shipments between the flat-rolled and tubular businesses to kind of offset that?

John Surma

Not yet. And had to, just to be clear, we chose to do that because we didn’t think the product was suitable for the kind of business we want to run. So I just make that slight amendment.

There was a variety of other material on the ground in these Texas, slab, and band. Again, a much longer supply chain because of the lack of a committed steel supply. So we’re working through that. But most of that was okay. Some was not, but most of it was okay. We’re just now getting linked up with Granite City and Fairfield and Gary and we had some steel flow from our traditional US steel plants in East Texas and the third quarter. A bit more in the fourth quarter and we’ll begin to hit, I think, a better stride next year on that.

Gretchen Haggerty

That was part of the reason for our improvement in the third quarter in flat-rolled versus second quarter.

John Surma

Right.

Operator

And we’ll go to Michael Gambardella with J. P. Morgan. Please go ahead.

Michael Gambardella – J. P. Morgan Securities

Yes. Good afternoon.

John Surma

Hi, Mike.

Michael Gambardella – J. P. Morgan Securities

I have a question. You’ve been looking for raw material acquisitions in Europe. Any progress there?

John Surma

No. We’re really looking for a raw material position and that could be anywhere from an acquisition to an equity interest to some different type of contractual arrangement. But nothing yet. We continue to explore that, but nothing that has got to the point of coming close to fruition or that we could talk about and explain to you. We do have excellent relationships with all of our suppliers there and we have a variety of different sources. They’ve been good suppliers, but for the moment they’re just suppliers and we’re just customers.

Michael Gambardella – J. P. Morgan Securities

And do you have any planned outages for the first quarter?

John Surma

None that we’re prepared to talk about now. I mean, those plans come together over a period of time and we’re just looking now at our schedule. Some of these things we can vary depending on what we see in the market. Mostly what we’re doing in the fourth quarter has been planned just because they have to get done and it’s traditionally a good time to do it for a variety of reasons. But nothing of consequence that I can think of right now, Mike, that we’d be prepared to talk about.

Gretchen Haggerty

We do generally tend to do work at our iron-ore operations in the first quarter because of, you know, just the seasonal effects up there.

John Surma

Yeah, we do normally our major outages on the equipment in Minnesota in the first quarter. I think if you just look at other businesses results quarter by quarter I think that’s pretty evident and my guess is we’ll do it exactly the same way.

Michael Gambardella – J. P. Morgan Securities

When will tubular be done with running through purchased slabs through their production?

John Surma

Oh, I think by the end of this year we ought to be in pretty good shape and be on a supply line back to our traditional US Steel plants. Maybe not 100%, but the majority of it should be worked through and we ought to be on the kind of supply chain we’re looking for probably by the end of this year.

Michael Gambardella – J. P. Morgan Securities

All right. And last question. John, were you surprised that ThyssenKrupp and Minnesota Steel, you know, appear to be going forward with their projects in the US?

John Surma

Not necessarily, Mike. I mean, I think in the instance of the plant in Alabama, even though we think the level of state support for that is a little bit beyond what might have been appropriate, that’s not my business to comment on. That’s a commercial decision by people who have capital and they want to take a risk and let the best company win. The fact that their view must be that the North American flat-rolled market has some growth prospects and that the overall steel consuming industries in the US have a decent chance of succeeding over time, that’s not much different than our view. If they want to take a risk and invest capital, that’s one thing.

The one in Minnesota I think is a different calculation and one that I’m really not prepared to say much on. Just to observe it’s still fairly early in that process and we’ll have to see how it plays out. But I think the extent that any investment in steel in North America reflects the view that the overall market is designed to be a decent market over time with some reasonable underlying growth in overall consumption. We see the same thing that the weaker US dollar will tend to favour the companies who consume steel globally. That’s also probably something we would agree on. And as long as they’re all commercial market-based decisions by commercial market-based companies, that’s the way life goes.

Operator

And we’ll go to Timna Tanners with UBS. Please go ahead.

Timna Tanners – UBS

Yeah, hi, good afternoon.

John Surma

Hi, Timna.

Timna Tanners – UBS

I wanted to ask for a little bit more detail on the flat-rolled products results, which was quite impressive. On the cost side you saw a $30 per tonne reduction from which has been kind of consistent, at least in the first two quarters. Could you give a bit more detail there because it’s pretty important and just to highlight how that can be continued going forward?

John Surma

Sure. Among other things, Timna, if you just look at the overall capacity utilization we picked up from 85 to almost 89. That’s a pretty substantial increase in raw steel capability utilization. You know, those incremental tonnes come at a zero fixed cost or near the zero fixed cost, so the incremental tonne for us is quite a competitive tonne because we’re consuming pallets that we’re manufacturing at a very competitive price, as well. So overall the incremental utilization is very, very cost effective for us and part of that is, I think Gretchen commented on it earlier, was for steel flowing towards Texas with the Lone Star acquisition we’ll see more of that. Otherwise I think we just ran our facilities quite well and we put a lot of capital, particularly into the blast furnace, as that’s where the cost really usually the battles fought and our blast furnace capability was fairly high and our facilities ran quite well.

I’d point out that the performance is more impressive when one considers that we did experience some increases for purchase coke. The market there is tightening. And also for a variety of furnace additions. As I said, molybdenum and all the other furnace additions. Those were pretty substantial increases. So we overcame that and more than overcame that and our costs actually were driven down largely by the overall higher utilization in a market that was just okay. So I think our performance in the flat-rolled business demonstrates what we can do.

Timna Tanners – UBS

In the third quarter you produced almost exactly what you produced in the second quarter. Is there something I’m missing on utilization?

John Surma

Well, our utilization in the flat-rolled business in the second quarter North America I think was about 85% and we were now up to almost 89%, I think, in the third quarter. So our raw steel production was 4.1 million up to 4.3 million. So we did produce a little bit more.

Timna Tanners – UBS

Okay. So I’m looking at shipment date. I should be looking at –

John Surma

Yeah, the raw steel capacity really gives you the cost number you’re looking for.

Timna Tanners – UBS

Gotcha. Okay then. Finally, if you could give –

John Surma

Oops. I’m afraid we lost Timna. Hello?

Gretchen Haggerty

I think we lost you Timna.

Timna Tanners – UBS

Okay.

Gretchen Haggerty

There you are.

Timna Tanners – UBS

Sorry. I’ve been here the whole time. That’s strange. I’m just trying to get a little colour form what your customers are saying. If you could just give us an update. Is there any recovery yet or is it too soon on some of the appliance and auto end markets? Is there anything changing there?

John Surma

Sure. As I said, I think our markets during the quarter were just stable. Some were more active than others. Those involved in the (inaudible) for example, were fairly strong, reflecting the water transmission energy industry. Those were quite good. Automotive was just moderate. A little bit up, a little bit down, depending on the customer. We’re very widely diversified across the customer groups. Those that are more aligned with consumer behaviour, like fly-ins and HVAC that reflect somewhat with what the housing market has done, we’re not as strong. Although not bad.

I think in general our markets were stable and I would say they’re stable going into this quarter. And the overwriting comment I would give is that our customers are cautious in keeping inventories very tight and very low. And while that doesn’t make us feel great, it does fly that when, I hope when the US economy begins to do a little bit better then I think the position is set up to have a pretty good response.

Operator

And we’ll go to Mark Parr with Keybanc’s. Go ahead.

Mark Parr – Keybanc Capital Markets

Thanks very much. Good afternoon.

John Surma

Hi, Mark.

Mark Parr – Keybanc Capital Markets

A couple of questions. First related to Lone Star. If you exclude the $27 million in non-operating charges, did Lone Star contribute to the quarter or was it a net cost?

John Surma

No, it did, although that’s getting harder for us to figure out because we’re not necessarily keeping separate score anymore. I mean, we have now really during the quarter established an overall two meter (sic) business unit. I think there was, I’m sure, some moderate positive income. But now with the closure of the small electrics and the rolling mills we’ve taken a big chunk of the high cost structure out and we’re really teed up to I think perform quite well. So there was a moderate profit but we are not really keeping score that way anymore.

Mark Parr – Keybanc Capital Markets

Along the lines of your entire M&A orientation here in the second half of ‘07. In the third quarter, were there any unusual costs associated say with due diligence on Stelco or with banking fees or any unusual SG&A associated with M&A that you could quantify?

Gretchen Haggerty

I don’t think anything that is worth commenting on really, Mark. I mean a lot of that’s going to go into the acquisition cost. We have to sort that out as part of our purchase when we finally make it. I don’t really think there is anything that worth talking about there.

Mark Parr – Keybanc Capital Markets

Okay. So I had just a couple other questions. One related to the European market. John, you talked about EUROFER filling a formal complaint this week. Have you or has the marketing organization in Central Europe seen any reduction in availability of Chinese bans in the last say month or so?

John Surma

It’s hard to get good data on that; it would only be anecdotal and I don’t know that we have seen anything, I mean as of at least yesterday, the last time I talked to our team there I think the product flows have been pretty brisk and that’s one of the reasons why these trade actions were brought. There has been a lot of discussion at senior policy levels as well from Europe as I am sure you follow in the trade press. But I don’t know that I could tell you we have seen anything of consequence yet, pretty soon for that.

Mark Parr – Keybanc Capital Markets

Are there any meaningful differences between the anti-dumping process in Europe versus the U.S. that we need to be aware of as far as watching how this process could unfold?

John Surma

Well, I am sure there is, but I am pleased to report that I don’t really know either of the two processes really well and I mean I think it’s similar in the same kinds of things about low cost and subsidization and injury and those kind of things, but I am not intimate enough with the details to really be much good on that, I am afraid.

Operator

Your next question comes from Aldo Mazzaferro - Goldman Sachs.

Aldo Mazzaferro - Goldman Sachs

In your European operations, John, could you comment a little bit about what you seeing in terms of the make-up of the types of imports that are coming in? I know you commented on China. I am wondering whether there are other geographic regions that are sending steel there?

I would assume that the market is getting a little tighter given the strong currency and how it’s attracting supply, but could you comment on how your cost structure, you think, compares to the delivery costs of some of those imports that you are seeing today?

John Surma

The big importers into the EU 27 on the flat side, of course, China is now by far the largest importer and I think by my numbers just through the first eight months, China is well over 5 million tons for the first eight months, which is unprecedented. I think the previous year might have been comparable period 2 million tons, so huge increase.

The other traditional importers would be Russia and Ukraine and some of the countries to the East; Egypt, Turkey are some of the countries to the South and India has become a larger supplier as well. So all the traditional importers have been attracted into Europe.

I don’t know that we have seen any real impact on those trade flows regionally. I think the cost to get material there is a lot more expensive now than it used to be, so for those countries that have commercial business rules, which is to say most countries other than China, they have got to be affected by the fact that the ocean freight rates are much, much higher for those that are ocean going.

Of course the euro also being much stronger, that’s a little more attractive to the U.S. market, so no doubt some imports might have flowed this way or are flowing towards Europe.

Where that all settles out? I am not really sure except to say that the imports from China in particular are way out in front of everybody else and that’s where the biggest problem is and that’s where we are not subject to normal commercial market based rules. That’s where the biggest issue is and that’s why they are tricky as well.

Aldo Mazzaferro - Goldman Sachs

Can I switch gears to the iron ore just for a second? I know I have asked you in the past about the potential to expand iron ore in North America and I know it isn’t something that’s on the front burner, but is there a point where the price of iron ore would justify that kind of investment and would it be possible at some point?

John Surma

It’s getting closer to the front burner I think with Stelco shortly and also with the prospect of running our other existing furnace configuration a little bit higher to make sure we can support East Texas over the long term, having a somewhat steadier diet of pellet consumption, suggests we may want to go a little bit higher. There are a couple of projects, sort of meaty things and then a couple that are more moderately sized projects that could take things up a measurable amount for us. We are looking at that pretty actively and are not prepared to declare our hand as yet.

But I think that’s something that deserves a close look because the higher the world price goes the more competitive we become and we are very, very competitive right now. So, it’s something we are going to give a good look at.

Operator

Your next question comes from Michelle Applebaum - Applebaum Research.

Michelle Applebaum - Applebaum Research

It was good to see you last week here in Steeltown, USA.

John Surma

Thank you.

Michelle Applebaum - Applebaum Research

I appreciated that boat ride and left your salesman alone. I don’t think anyone has been as impressed as I have been over those last few years by all the strategic events that you’ve done from buying back shares to acquiring Stelco; the whole national thing in labor and just so much change in such a short period of time.

I wanted to ask a little bit more of a critical question, because this issue of integration gets bigger and bigger every year with the price increases in iron ore and coal and the other raw materials. We all know that you have this huge advantage.

My question for you is the tougher question which is when you talk to some of your peers about and try to get at some of the carbon steel results in North America from the other companies, you find that the profitability actually doesn’t reflect that premium. Could you talk a little bit about what that’s about and what you are doing about it?

John Surma

If I understand the question it’s really comparative profitability if that’s what you are asking about. We try to assess that because it’s instructive and gives us a target to shoot for. It’s getting harder to find anything that’s directly comparable in our North American flat-rolled segment There aren’t many good comparisons anymore that we can analyze and study, we do that at a very micro level through variety of committees ASI, AST, et cetera. But on a company-level basis that’s become extremely difficult to do because of just the way things are reported by other companies, no criticism intended.

Having said that, we have objectives every year to improve our cost position. We have capital plans to improve our market position and we are striving to do the best we can do and improve our competitive position. But in terms of giving you dollars per ton for XYZ plant versus ABC plant it’s really hard to find that out. I wish I knew it, but it’s really not something we have access to.

Michelle Applebaum - Applebaum Research

Well, I am not asking at all about plants. I am asking about overall carbon, steel flat-rolled results and I think that some of the information is public like metal and I think your integration is much higher than theirs and you have been less profitable although we don’t have their third quarter results. Other companies seem to talk freely -- I am talking about corporate-wide, about specialty versus carbon -- you haven’t seen any of that so that you can compare it? So you are not aware of that?

Gretchen Haggerty

I don’t think they report it that way in their segment results.

Michelle Applebaum - Applebaum Research

They don’t, I mean [Middle] does, but anyway.

John Surma

I think they are reporting their -- I shouldn’t comment on this, but as I recall it is for the Americas I think and if we had that sort of thing I would be delighted to do it, perhaps we’ve just missed it. If you have anything I would like to see it.

Michelle Applebaum - Applebaum Research

I would be happy to send you what I have. Then another question, I was going to ask, I saw price increase on CMOS pipe coming out of Sumitomo a few months ago and I never saw any response to it. Did it not float?

John Surma

I am not aware of that, Michelle. We are striving to get the highest price as we can for our product. Typically that was on the CMOS side, I am not aware of what happened to that or where it was, which products and I am not sure we compete in our market heads-up a whole lot with them, probably some but not a whole lot. I can’t comment really on that. I will have to look into it further.

Operator

Your next question comes from John Tumazos - John Tumazos Independent Research.

John Tumazos - John Tumazos Independent Research

Congratulations. I have similar questions to Tim and Michelle. The productivity improvement in the flat-rolled division, in particular, some of the finishing mill end markets were not really that dynamic like appliances for Mon Valley or tubes distributors and construction for Granite City or Fairfield. Detroit wasn’t that great for Great Lakes.

Were there particular facilities that had production or productivity records and is your mix moving more toward grades of steel that no one else makes like a higher proportion ultra high strength full alloy for automotive or things that are a little more defensive when the markets are a little sloppy?

John Surma

A couple points John. Number one, we probably had some records at various facilities. I know in the Mon Valley we had a couple of [inaudible] that were very, very long and a couple of things at the Great Lakes. We had a variety of those but this wasn’t our highest production quarter but it was a very balanced strong production across all the facilities and everything ran well in our operating group led by John Goodish and his team did an excellent job with excellent safety performance, I might add. But none, as you point out, were particularly going gangbusters,

The markets were just okay. We had a good performance in light of just the reasonable market conditions. Your latter comment I think though is revealing we do have, particularly on the auto side, an excellent position and a lot of the high strength in advanced high strength steel which are not particularly easy to make by the way, and do require a lot of additional metallurgy that we have the investment in and we can make as cost effectively as anybody. That certainly helped to keep our auto position reasonably strong in light of the relatively languid market. But I would just say that overall things were just okay, and we ran the plants, our team ran the plants, our employees ran the plants extremely well.

Operator

Your next question comes from Charles Bradford - Bradford Research.

Charles Bradford - Bradford Research

Apparently last week the European Union court ruled against you guys when it comes to the emissions in Slovakia.

John Surma

Right.

Charles Bradford - Bradford Research

They require a 25% cut in emissions effective the beginning of next year. Apparently you would have two choices: one is a cut production, which I doubted you are going to do or buy emissions credits. If you want to buy those emissions credit today what would it cost?

John Surma

It’s hard to answer that, Chuck because that’s just one piece of the puzzle. I mean we continue to work through, this is a national allocation plan, we continue to work through that. Slovakia receives from the EU body a certain level of allowances which then we get our share of and there has been a variety of discussions at the ministry level in Slovakia. We think we are moving towards the conclusion which will be I hope something we could live with. We are still considering our options in that legal action because we think both the country and we were not fairly in that process and haven’t been generally.

But even if that is not successful we think that we will be in a position where the difference between what we are going to need and what we were going to get won’t be so significant that you have to calculate that in the overall emissions; I am forgetting now, but I think it’s roughly two tons of carbon per shipped ton roughly. I have to get the exact numbers. You can see what the market price is for allowances these days in Europe whether it’s $10, or $20, but it’s in that order of magnitude.

Charles Bradford - Bradford Research

When you look at proposals that have been put forward in the U.S., for example, the Jingle plan or some of the other arrangements, what do you think makes some sense considering the mini mills or emitting a lot loss carbon than you guys are?

John Surma

They are taking advantage of an extremely efficient national recycling system we have that makes steel the most recycled material in the world. Most of the plants we see that right way gravitate towards cap and trade, because of our experience in Europe we don’t think it’s the right way to go. It forces someone in this case, the folks in Washington to pick winners and losers. We don’t think they are particularly good at that quite frankly, and I would prefer it to be a system which is more, particularly for a global industry like ours, has a more global kind of approach.

What we are most concerned about would be if in some rush to enact something it’s a cap and trade system that for some reason is applied to industries like ours, what that would do without some other kind of safeguard would be to encourage production to move to other regions such as China where there are no limitations, if they don’t sign up and where the emissions intensity is two or three times higher. So we would have succeeded in doing nothing more than damaging our national economy and increasing carbon emissions.

We think that’s a terrible result, and we speak to anyone who will listen to us that that’s not the right thing to do. We think the IISI, AISI sponsored global sector approach where we all work together for best available technologies and reduce our overall intensity is the best way to go.

I would remind you that due in part to the electric furnace contributors that our overall CO2 and energy intensity since 1990 in North America is down 27%. So we’re way ahead of where the cumulative requirements would have been.

Operator

Your next question comes from Michael Willemse - CIBC.

Michael Willemse - CIBC

I just want to go back to a comment I think Gretchen made at the beginning about $400 million in receivables, a facility had already been set up with the Stelco acquisition.

Gretchen Haggerty

Yes.

Michael Willemse - CIBC

Is that an off balance sheet facility?

Gretchen Haggerty

Well, it’s a receivable purchase facility. You can see we had about $500 million undrawn off balance sheet, I think is relative; it’s fully disclosed and people treated it as debt.

Michael Willemse - CIBC

You said it was about $400 million or $500 million?

Gretchen Haggerty

Well, the availability is about $500 million. We actually drew $400 million in preparation for a closing this week, so we actually have drawn on all of the facilities and we’re ready to go.

Michael Willemse - CIBC

And then just on the inventory levels at Stelco, do you have an idea yet on how much you think? I mean you talked about reducing inventory at Lone Star, how much you think you could reduce inventories at Stelco to get them more in line with desired levels?

John Surma

That’s hard to say at this point without really being there and being involved. We had a better feeling about the ability to do that at Lone Star, because again they were steel short and they had a long supply line, so that was, I think, much more apparent to us. Our sense, at least my sense at Stelco is that based on what we have seen so far, that the management team there, Rodney Mott and his colleagues, they have done a good job of running the facilities and have kept a pretty good handle on inventories.

I like to think that as we get an overall larger North American supply chain together we can do better, but I am reluctant to say how much in terms of percentages of dollars. That would be one of our focus areas but my sense is there it won’t be as quick and as apparent. That will be through normal blocking and tackling.

Michael Willemse - CIBC

On the inventory charges, purchase accounting charges at Lone Star, do you think you will have more charges in the fourth quarter or do you think we have ran through most of them in the third quarter?

John Surma

I’d say most, but it is not impossible that you might see something, We don’t come up with a lot of excuses as you guys know if it’s normal routine business stuff, that is a different question but I think the majority of the major things we had to deal with we wanted to get done because we told all of you we would and I think we got through most of it.

Michael Willemse - CIBC

lastly, you had announced investments in new large diameter pipe facilities in North America. I am just wondering where you are with large diameter pipe investments? I know Lone Star had been talking about one in Texas. I think that’s off the table now. What about the one on the joint venture on the West Coast?

John Surma

I think you have that right. The one that Lone Star had underway is in fact off the table. The one on the West Coast continues. We are into the engineering phase in that process and working our way through it. It’s not quite ready to pull the trigger on it yet but we are getting close to that. So, we’re still working our way through it, just in the engineering/permitting process now. There was some progress on that in the last week or two I think. So, we think that’s one project with great prospects. A good partner, two good partners actually and a good market for us, so we are excited about it.

Michael Willemse - CIBC

When do you think it could finish construction?

John Surma

That’s at least a year to year-and-a-half kind of a schedule. I am not seeing all the details on it yet but I would say it’s in that zone, year to year-and-a-half.

Operator

Your next question comes from Dave Martin - Deutsche Bank.

Dave Martin - Deutsche Bank

First off on the comments earlier about auto contracts, can you remind us how many tons are due to be repriced for ‘08?

John Surma

I don’t know that we want to give total tons. I mean it would be either at the beginning of ‘08 or some later on. It would be the majority of our overall auto book, which is probably a quarter of our overall businesses going to be up for repricing.

Dave Martin - Deutsche Bank

Secondly, coming back to the comments about outage costs in Europe and there have been some significant outage costs in the recent quarters; you mentioned the major rebuild in Serbia. Are there any major rebuilds planned for 2008 and what costs can I associate with the major rebuild in ‘07?

Gretchen Haggerty

I don’t know that we have anything for ‘08.

John Surma

I am sure there is an easy way to characterize that. I mean there is a certain diet of these things that are more routine that like we have this quarter which are each two or three weeks each. Those are fairly steady diet of those, higher in some quarters, some quarters lower.

The major projects where we think it comes down for a complete rebuild like we are doing in Serbia is less common and I don’t know that we are prepared to say. Those typically are more capital but they are much longer and in production for a lot longer time. I am not sure we can tell you that next year; I can’t tell you next year what exactly we are planning on doing because those plans are just coming together. There will undoubtedly be some outages. Some will be longer than others. We may have a project in one of the facilities furnaces in Slovakia that will take a little bit longer but until we are actually committed to those I hate to get into details.

Operator

Your next question comes from Marty Pollack - NWQ Investment Management.

Marty Pollack - NWQ Investment Management

A couple of questions, there are a lot of way of looking at some of your results, but as an example when I look at the tubular your year-ago margins 36% on an operating basis; I think 24% in Q2 and 12% in this quarter. Clearly the revenue impact of Lone Star is affecting margins via mix,

I am just wondering though, can you give us a sense when we look at that whole group, is there a way to think about what would be the normal stable profits on margins here, and in fact how much is integration costing? Trying to get a sense of may be normalized level.

Gretchen Haggerty

That’s probably a hard question for us to answer right now Marty, because we are really sorting through a lot of transition stuff and just trying to get the business on the model that we want going forward.

There is no question that if you just go back and you look at Lone Star’s results and their margins prior to our acquisition, it was a lower margin business but they also tried to sell their welded the product for some higher, they had some higher value-added uses for that. We are just trying to pull all that together and hopefully raise margin overall with the general approach that we take.

The one thing about Lone Star though is that a lot of the synergies are liable to fall out in the flat-rolled segment. As we work through that, this year we will have a better sense of that. So while there should be some margin improvement from synergies related to some of the cost synergies, purchasing synergies thinks like that, most of the sourcing benefit is really going to be probably fall on the flat roll side and I think we saw some of that in the third quarter.

So as we get through this year and maybe get a better look at how things are going to look going forward, we might be able to be more helpful on that.

Marty Pollack - NWQ Investment Management

How is the integration going? Is there a sense that things are going as you expected and possibly what would it be, if we look into next year, would integration costs be tailwind of some amount?

John Surma

I think our integration has gone well and on the schedule that we have been looking for. We have a business unit established with the business unit leader, management team and the market leader, a unified approached to the market, a distributor selected in each of the major product groups; they have be notified there are on board. We are working our way through the supply chain as we mentioned, took out electric furnaces. We have done everything we said we are going to do, may be a little bit faster pace than we originally laid out.

Of course, we are all viewing that through a market picture, which is a little bit murky. But I think we will exit this year with the business unit established, the unified market approach established, and we will be able to sail into next year and that will give us a much better picture as Gretchen said as to where we going. I think on the actual integration plan we laid out we are on or ahead of schedule.

Marty Pollack - NWQ Investment Management

On the other side, iron ore as it affects North America and Europe, seaborne iron ore trade, I mean those price increases possibly up 50% this year or 30% or 40%, obviously can be very material. They would affect I would imagine your European operations in terms of the benchmark of pricing. It seems like international iron ore is definitely a higher price and possibly a higher cost.

On the other side, on the North America it seems the history, one looks at a Cliffs sort of pricing trends. It doesn’t seem that we are gaining the same type of leverage on pricing. So that I think historically only a quarter of the same price increase internationally you are seeing domestically.

I understand since you are not really a third party seller I am not sure whether you’re missing any benefits but are you getting the same cost benefits if in fact there is less volatility in those prices?

John Surma

Let me take those in reverse order. For the most part we are producing in Minnesota our two plants over 20 million tons and consuming all that in our facilities and we’ll make as much as we can because our consumption is going to be a bit bigger now. Our focus there is to keep our cost as low as we possibly can and our costs next year will be I hope within a short distance of what our cost was this year.

While we might take some interest academically in what the Cleveland Cliffs’ price would be it’s not really something of great interest to us because we are not either buying or selling in North America.

The seaborne price, the higher it goes to the extent that it find its way into some of our competitors’ furnaces, we think that’s just fine in North America. In Europe, I would just say Marty we don’t exactly play to the seaborne price in Europe. We are working with suppliers in the east who generally aren’t seaborne players and as a result our materials cost typically would move more aligning with spot fuel prices in Europe and less so the seaborne iron ore price.

So that’s normally how things have gone and that’s why in this third quarter and also in the fourth quarter in Europe the overall raw materials prices were relatively flat because steel prices were relatively flat and the bigger increases came earlier in the year.

We are a little bit out of that seaborne price trade in the Europe and in the North America; we will observe what happens with Hughes, but generally speaking the higher it goes and more competitive it makes it.

Operator

Your final question comes from Bob Richard - Longbow Research.

Bob Richard - Longbow Research

I think this may have already been touched guys but what’s driving the Stelco’s synergies? Is it more due to the higher utilization of the finishing assets here in North America? It is going to add about I believe 900,000 tons of slab. Are you now in balance or are you still slab short after the Stelco acquisition?

John Surma

The 900,000 by the way is our best guess so it might be a, might be a little higher, it’s hard to say it could be little bit lower depending on how things run in Canada, again we won’t know all that just yet. That additional 900,000 tons, if we choose to finish it all in North America, which we would be in all probability Great Lakes and Granite City, we would had a little bit more room left in our strip mills, but not a lot. We would be getting towards the top end of what we could handle. There may be episodes where we can handle more, but that would not quite philosophically get us in a much, much better position of utilization.

We are not going to necessarily finish all of those; there may be other options which could be selling slabs either in North America or elsewhere. We are looking forward to exploring all that given the macro economics, we think that a nice position to be in.

Bob Richard - Longbow Research

The sale of the railroad, when is that supposed to close?

John Surma

That’s the subject of all sorts of regulatory requirements that have to be carried out with Surface Transportation Board, if that’s the right name.

Gretchen Haggerty

Right.

John Surma

That in all probability will be well into mid next year before that would be finished.

Bob Richard - Longbow Research

That’s going to be a material gain, I would have guessed, right? I can’t imagine the book value of those assets being all that much?

John Surma

I think your guess is a good one. Of course the reason for that, I think it’s quite a fair value for our shareholders and we have things we can do with that capital and having an excellent service provider to give us the kind of service we need and just made the right thing to do, but it will be a substantial gain, you are right.

Nick Harper

With that, we thank everyone for participating and we’ll talk to you next quarter.

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Source: United States Steel Q3 2007 Earnings Call Transcript
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