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United States Steel Corporation (NYSE:X)

Q4 FY07 Earnings Call

January 29, 2008, 3:00 PM ET

Executives

Nick Harper - Manager of IR

John P. Surma - Chairman and CEO

Gretchen R. Haggerty - EVP & CFO

Analysts

John Hill - Citigroup

Timna Tanners - UBS

Aldo Mazzaferro - Goldman Sachs

Michael Willemse - CIBC World Markets

Mark Parr - KeyBanc Capital Markets

David Martin - Deutsche Bank

Marty Pollack - NWQ Investment Management

Charles Bradford - Bradford Research

Ted Izatt - Bear Stearns

Operator

Ladies and gentlemen, thank you for standing by and welcome to the United States Steel Corporation’s Fourth Quarter 2007 Earnings Conference Call and Web cast. At this time, all participants are in a listen-only mode and later we will conduct the question-and-answer session with instructions being given at that time. [Operator Instructions].

As a reminder, today's conference is being recorded and I would now like to turn the conference over to your host, the Manager of Investor Relations, Mr. Nick Harper. Please go ahead, Sir.

Nick Harper - Manager of Investor Relations

Thank you, Kevin. Good afternoon and thank you for participating in United States Steel Corporation's Fourth Quarter 2007 Earnings Conference Call and Web cast. We'll start the call with some brief introductory remarks from US Steel Chairman and CEO, John Surma.

Next, I'll provide some additional details for the fourth quarter and then Gretchen Haggerty, US Steel Executive Vice President and CFO will comment on the outlook for the first 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 10-K and updated in our quarterly reports on Form 10-Q in accordance with the Safe Harbor provisions.

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

John P. Surma - Chairman and Chief Executive Officer

Thanks, Nick. Good afternoon everyone and thanks for joining us. Earlier today, we reported fourth-quarter earnings of $0.29 per diluted share. These results include a number of items not allocated to segments including inventory, transition effects of $69 million related to the Lone Star and Stelco acquisitions and a $57 million charge associated with the early retirement program at USSK. You might recall that we discussed the potential for these charges on last quarter's call. Excluding these items, which reduced net income by $117 million or $0.98 per share, our results were $1.27 per diluted share. These results were lower than our third quarter results and lower than what we expected when we discussed our outlook on last quarter's call for several reasons that we'll review in a minute.

Going forward, it does appear that the markets are moving in the right direction and that business conditions for us are improving. And you may have noted earlier today that we increased our quarterly dividend by $0.05 per share to $0.25 per quarter or $1 per share.

Now looking back at 2007 in total, US Steel had another good year with record revenue of $16.9 billion, operating income $1.2 billion, net income of $879 million. We're particularly pleased with our continually improving safety performance, which is always our company's top priority. In 2007 on a global basis, our OSHA recordable rate improved by 13%, and we achieved a 42% reduction in days away from work cases. Our managers, employees and union colleagues deserve the credit for this steady improvement. We are all working hard together to continue this important trend.

Now before I comment on our results, let me just remind you that we have not closed our Canadian acquisition at the time of our last earnings release and therefore U.S. Steel Canada was not within the scope of our fourth quarter outlook. In addition to segment income and income from operations, the acquisitions had an effect on net interest expense and our tax provision in the fourth quarter, more on that a bit later.

Turning to our operations we reported fourth quarter segment income of $257 million or $43 per ton. We experienced challenges in each of our operating segments and completed several planned and unplanned facility maintenance outages. We operated at 82% of raw steel production capability in North America, 79% in Europe, down from third quarter levels of 89% for both segments. Our Flat-rolled segment operating income of $53 million declined significantly from the third quarter as we included the operating results of the U.S. Steel Canada effective October 31st, and we completed a number of planned and unplanned blast furnace repair outages during the period.

U.S. Steel Canada lost nearly a month of production as a result of unplanned blast furnace outages operating at only 60% of capability for the two months compared to 89% in third quarter of prior to our acquisition. Lower average realized prices compared with third quarter primary reflected a higher level of hot-rolled and semi-finished with the addition of U.S. Steel Canada. In addition cost for raw materials, natural gas and outages and modernization increased.

U.S. Steel Canada added 557,000 tons to fourth quarter Flat-roll shipments under partial arrangements in place at the time of the acquisition in which we of course played no role. An operating loss was incurred at U.S. Steel Canada for the two months as unplanned blast furnace outages resulted in lower shipments and higher unit production costs. Of course November and December are usually not strong months in any event. Our operations in Canada have been much more reliable this quarter and we are completing the commercial arrangements we inherited with the acquisition.

The acquisition of U.S. Steel Canada brought with it about 900,000 tons of excess slab on an annual basis and we will likely be selling a meaningful quantity of slabs in 2008 and finishing the rest on our U.S. facilities. While slab sales tend to reduce average prices as we reported to you, the margin on slabs can at times be quite attractive. North American steel market fundamentals continue to improve during the fourth quarter and service center inventories and Flat-rolled imports declined throughout 2007 to historically low levels. We are cautiously optimistic that our shipments and prices to the North American Flat-rolled market should improve supported by higher freight rates, the relatively weak U.S. dollar compared to most major currencies, high scrap prices and the prospects for a significant increase in the sea born price for iron ore.

North American spot prices have been increasing in response to these factors as we expected. And we were realizing these increases in our spot business as the quarter progresses. The sustainability of this favorable trend will depend to some degree on the strength of North American economy, particularly for the second half of the year. The U.S. Steel Canada integration process is moving forward and we expect a much higher operating rate in the first quarter. We continue to expect at least $100 million of annual run rate synergies by the end of 2008.

Primary source of the synergies will be expanding our supply chain in providing semi-finished steel to our Flat-rolled and Tubular finishing facilities in the U.S. although as I mentioned, we also expect to be in the semi-finished market to some degree in 2008. As a result, we expect improved operating efficiencies throughout our entire system from our iron ore operations in Northern Minnesota throughout our U.S. hot strip mills, coating lines, and pipelines [ph].

Additional benefits include leveraging procurement and best practices and overhead reductions. In a moment, Gretchen will review our recent acquisition and financing activities.

Our fourth quarter European segment operating income was $85 million or $61 per ton, that excludes the impact of the workforce reduction program in Slovakia. The fourth quarter results included unfavorable production and shipment volume effects associated with the rebuild of one of our two blast furnaces in Serbia, the repair of one of our three blast furnaces in Slovakia and a decline in euro-based steel prices as high imports particularly from China and high service center inventories in Europe pressured spot prices and order rates. Also, raw material and energy cost increased. The outages limited our production to 79% of capability. In addition, shipments from Slovakia were negatively affected late in December by a Hungarian railway strike.

The workforce reduction program in Slovakia was completed with about 1500 employees accepting the offer and just under half of them left the workforce during the fourth quarter. The remainder will be leaving throughout 2008. We anticipate the 2008 productivity savings will be about $25 million increasing to $33 million annually beginning in 2009.

During the fourth quarter the European and the consuming markets remained reasonably stable. Although Europe based spot pricing was down from the third quarter due to unprecedented levels of Flat-rolled imports especially from China. However, recent reports indicate that both Southern and Northern European spot prices have begun to firm and could increase through the first and second quarters. Southern Europe is a large consumer of imported product and as such price increases in this region bode well for near term European Flat-roll pricing.

Turning to our Tubular Segment, during the fourth quarter we earned $83 million or nearly $195 per ton on shipments of 427,000 tons. Compared to the third quarter, results improved slightly due mainly to higher average realized prices resulting from a change in product mix and improved overall cost performance partially offset by our shipments.

High inventory levels coming into the quarter and year-end ad valorem taxes led our Tubular distributors and service vendors to continue driving inventories lower during the quarter. Market prices for both seamless and ERW products were generally lower pressured by inventory de-stocking and low priced imports most notably from China.

Recently we have announced several Tubular price increases for most sizes and applications ranging from $50 to $200 per ton. The higher prices will be realized mostly in the second quarter. Increases are intended to recover higher costs primarily for semi-finished steel and in particular for the high alloy component of our product line. Market fundamentals and demand are positive as 2008 drilling programs begin. Our Lone Star integration process is nearing completion and we are on track to achieve our initial estimate of at least $100 million of annual run rate synergies.

The primary contributor to the synergies are semi-finished steel supply as we integrate the assets acquired from Lone Star into the U.S. Steel supply chain for hot-rolled product. Additional synergies include leveraging procurement and best practices and overhead reductions. Due to our shorter supply chain now, steel cost increases and decreases are reflected more rapidly in Tubular costs again especially for high alloy grades.

In summary, 2007 was one of the more significant years in our 106 year history. From a financial perspective, 2007 was one of our best years. It was also a year of strategic action as we acquired Lone Star Steel in June doubling the size of our Tubular business. Then at the end of October, we purchased Stelco and increased our annual production capability by 4.9 million tons to 31.7 million tons, making U.S. Steel the fifth largest steel producer globally.

These acquisitions are expected to result in at least $200 million of combined annual run rate synergies by the end of 2008. These savings coupled with the savings from the U.S.S.K early retirement program, should significantly bolster each of our three main business segments. A good portion of our work in 2008 will be focused on delivering on the commitments we made in 2007.

Now I'll turn the call over to Nick for some additional details about the quarter's results. Nick?

Nick Harper - Manager of Investor Relations

Thanks, John. Capital spending which is detailed by segment in the earnings release totaled $215 million in the fourth quarter, resulting in full year capital spending of $675 million, lower than our earlier estimate of $725 million. Our current plan for 2008 is total capital spending at approximately $940 million, with $675 million for North American operations and $265 million for European operations.

North American capital projects for 2008 include mining and equipment at our iron ore operations, [inaudible] operation and a proposed co-generation facility at Granite City which will be fueled by glass furnace gas and [inaudible] gas from a third party non-recovery coke factor, which are both subject to environmental approval.

In Europe, 2008 major capital spending projects will consist of a relying of the number one glass furnace Kosice and a number of environmental projects in both Slovakia and Serbia. In addition, we will also continue the implementation of an ERP system in both North America and Europe.

Depreciation, depletion and amortization totaled $154 million in the fourth quarter and $506 million for the year. Depreciation is expected to be above $660 million for 2008. Defined benefit and multi-employer pension and OPEB costs for the quarter totaled $69 million. We made cash payments for pensions and OPEB of $109 million; Gretchen will discuss these more in a moment.

For 2008, we expect our pension and OPEB cost to be roughly $200 million compared to $266 million in 2007. Excluding voluntary contributions, we expect cash pension and OPEB payments to be approximately $570 million, which include among other things, the cash related to the obligations assumed from the Stelco and Lone Star acquisitions. Gretchen will discuss this more in a moment, and additional details will be included in our 10-K, which will be filed in late February.

Net interest and other financial costs totaled $44 million in the fourth quarter compared to $22 million in the third quarter. The increase reflects interest expense resulting from debt incurred from the Stelco acquisition. We expect first quarter net interest expense to be about $50 million before any potential foreign currency gains or losses. Our effective tax rate for the year was higher than projected at the end of the third quarter as a result of the inclusion US Steel Canada and a change in the profile of our global earnings. As a result, the tax provision in the fourth quarter included $20 million to apply this higher tax rate to income for the prior three quarters.

Our estimated annual effective tax rate for 2008 will be higher than in prior years as we expect to reach the limit on the tax credit in Slovakia that has been available since we purchased USSK in 2000. As a result, earnings at USSK will be taxed at 19%, less approximately $25 million of the remaining credit. Our domestic earnings will be taxed at the statutory rate of about 38%. US Steel Canada is expected to modestly increase our effective tax rate. This matter will be covered in more detail in our 10-K. Lastly, for the quarter we averaged 118.5 million fully diluted outstanding shares.

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

Gretchen R. Haggerty - Executive Vice President & Chief Financial Officer

Thank you, Nick. Our cash flow in 2007 was good with cash provided by operating activities of as approximately $1.7 billion. Excluding the $4 billion of cash invested for the Lone Star and US Steel Canada acquisition, our free cash flow, after capital spending and after dividend, but before external financing was approximately $1 billion. We ended the year with $400 million of cash and about $1.6 billion of total liquidity even after making a $468 million contribution to our trust of retiring health and life insurance in late December. I'll talk a little more about this in a moment.

During the fourth quarter, we accessed the debt capital market by issuing $500 million of annual maturity senior notes with a coupon of 7%. Proceeds were used to retire debt associated with financing the Stelco acquisition. As of 12/31/07, we had a long-term debt balance of approximately $3.2 billion. During the fourth quarter, US Steel and the United Steel workers agreed that US Steel will provide healthcare and life insurance benefits to certain former national employees and their eligible dependents under a US Steel insurance plan using funds that have been accrued based up on provision of the 2003 Basic Labor Agreement.

In December, we contributed $458 million to our trust for retiree health and life insurance. You might recall that we have identified the growing balance of this profit-based obligation for some time. As a result of this agreement our OPEB obligation increased by approximately $314 million as of the end of 2007. Beginning with the fourth quarter of 2007, we eliminated this profit-based charge from our retiree benefit expenses. But the funding obligation continues through August 31, 2008 the expiration of our Basic Labor Agreement. The amount contributed to our trust going forward would be calculated as before, with the variable contribution based on 6 to 7.5% of profit from operations.

We remeasured our OPEB obligation as of December 31, 2007 and our unfunded OPEB position is estimated to be $2.9 billion including the obligations for such former national employees and their dependents, as well as the obligations assumed at U.S. Steel, Canada and Lone Star. We expect our OPEB expense to total approximately $140 million for 2008. We also remeasured our pension obligation as of December 31, 2007 and on a consolidated basis including U.S. Steel Canada and Lone Star it is now over funded by an estimated $223 million for accounting purposes.

We expect pension expense of roughly $60 million in 2008, compared with about $130 million in 2007. Again more detail on this matter will be included in our 10-K. The Stelco acquisition was funded with cash on hand and various U.S. borrowings the proceeds of which were sent to our Canadian acquisition company through a series of inter-company loans and capital contributions, to and from European subsidiaries. This approach allowed us to fund the acquisition from the U.S. as well as to reinvest the undistributed foreign earnings from U.S. Steel Europe. This approach improved our long-term flexibility to efficiently utilize funds generated offshore.

However, volatility in net interest and other financial costs could increase going forward, as a result of foreign currency accounting remeasurement effects, primarily on a $1.2 billion inter-company loan to a European affiliate related to the acquisition of U. S. Steel Canada. As this inter-company loan is repaid, our exposure will decrease also we expect to mitigate a portion of this volatility with our normal hedging activity.

As noted in the earnings release, we repurchased 295,000 shares of common stock in the fourth quarter for a total cost of $30 million. This brings our total repurchases to 14.3 million shares or approximately $812 million and represents more than 11% of the balance of fully diluted shares outstanding when we authorized the original repurchase program in July of 2005. 6.5 million shares remain available for repurchase under the current authorization.

Turning to our outlook, we expect first quarter results to continue to reflect the volatile cost and pricing dynamics in our three major segments. Overall, we should be in a good position as 2008 progresses to take advantage of favorable supply side conditions, our expanded product and geographic positions in North America, and our new galvanizing line in USSK. For Flat-rolled, we expect improvement from fourth quarter results as shipments and operating rates are expected to increase compared to the fourth quarter with the inclusion of US Steel Canada for the full year and the completion of the blast furnace project that John talked about.

Our facilities in Canada have been operating much more reliably. Prices are also expected to be higher as increasing spot market prices will be realized through out the quarter. In addition, customer commitments in place at the U.S. Steel Canada at the time of the acquisition are being completed and new commitment consistent with U.S. Steel's commercial policies are being made.

We also expect significant cost increases for raw materials, particularly purchased scrap, coke and alloy. For U.S. Steel Europe, we expect higher euro-based prices and shipments should increase as a result of higher facility availability in the quarter. Escalating raw material costs are expected to partially offset these improvements. Shipments and prices for the Tubular segment are expected to remain in line with the fourth quarter and semi-finished steel cost will increase.

Other businesses will reflect a normal and favorable seasonal effects of the closing the Great Lakes for [inaudible] shipment. So we typically do not comment on our outlook beyond the current quarter, but given the dynamic North American Flat-rolled steel environment, we thought it would be appropriate to expand our remarks a bit. Given our very favorable supply side data point and the recent spot price increases, we are optimistic about our results for the next several quarters. However, it will take a few months for our results to fully reflect the spot price increases and the results of the integration of our new businesses. The overall direction of the U.S. economy will also be important. Nick?

Nick Harper - Manager of Investor Relations

Kevin, could you please queue the line for questions

Question and Answer

Operator

[Operator Instructions] And our first question will come from the line of Michael Willemse of CIBC World Markets.

John P. Surma - Chairman and Chief Executive Officer

Mike?

Unidentified Analyst

Yes, actually this is Adam Puller [ph] from Guntermann Research [ph]. A couple of things regarding this really challenging economy that we're experiencing right now. John, what are your operational improvement initiatives revolving around lean manufacturing, TPM, Six Sigma, and how do you expect those to benefit and improvements in throughput throughout your plants and throughout your bottom line?

John P. Surma - Chairman and Chief Executive Officer

Well, we have a very well developed and widely distributed continuing cost improvement program as well as a variety of continuous improvement activities largely at our manufacturing locations and that process involves setting specific targets for each operating units in the company, wherever they may be and there are specific dollar amounts for specific things that's a web based system and we total them up each month the group that's responsible at the operating levels, task with completing those projects is part of their individual metrics, the unit metrics that affects everyone's rewards. So, it's a well-developed, well-prosecuted process that we've been using for a number of years and again this year in our 2008 plans, we have substantial cost improvements built in our system.

Operator

Thank you. And next we'll go to the line of John Hill of Citi.

John Hill – Citigroup

Great. Thank you and thanks for a detailed and portrait presentation as always.

John P. Surma - Chairman and Chief Executive Officer

Thanks, John.

John Hill – Citigroup

We have spend a lot of time talking about the U.S. Steel and in fact you gentlemen have about the protective cost umbrella from internal sources of raw materials and the pricing leverage externally, obviously this quarter did not demonstrate those for a number of the reasons that you laid out. But we are just wondering is this still a core… you believe is still core attribute of the company and something that investor should be focused on as a driver of margins as we go forward?

John P. Surma - Chairman and Chief Executive Officer

By all means, I will just give you a couple of observations on that. The basic premise of our cost structure particularly in North America having a little more stability, I think is still there, I mean, our iron units will be slightly higher in 2008 than 2007, but only single digits. So I think whatever advantage is there will likely expand substantially depending on what happens with the global iron ore settlement. And the fact that we are… expect to be running at much higher levels, I think that will allow us to withdraw some of the cost benefits from the incremental ton not being quite expensive as the last time, and also the fact that as Gretchen pointed out in some of the outlook comments on the supply side spot prices are moving, overall prices are moving and I think we are on the right trajectory with the questions how quick that all happens and I think over a period of years you all have had a chance to observe how that works through our system and we expect some price results in the first quarter but as time goes on more and more would be manifested.

We did point out the record on the cost side that among other things what we are dealing with is purchased coke. Purchased coke is quite expensive on the market these days, in the total context the things, I think our overall hot band cost is a reference of how well we can manage our cost in North America. Our overall hot band cost increased because there will be a higher cost in 2008 will be at the very low end of the spectrum of analyst and others like you that have guessed what cost increases will be for European and US Flat-rolled mills. I feel fairly good that we are going to be at the low end for 2Q ratings, Iron units are under control, higher operating rates generally much more cost effective operation.

John Hill – Citigroup

Great color, great color, also it seems they were several blast furnace outages that were unplanned and other items and the press release featured quite a recitation of these. I just wonder if you could summarize... someone of the team could summarize a couple of the most significant unplanned operating outages and perhaps quantify some of the impacts to the company.

John P. Surma - Chairman and Chief Executive Officer

Sure. These things occur from time to time. For us, happily they have been incurring less frequently but just starting East to West in Europe and Slovakia we had on one furnace an unplanned project that we thought for the sake of safety and stable longer term operating rates that we need to do some work on one of the furnaces and that put a bit of dent in our steel making in the fourth quarter that wasn't part of our plan which has an effect on cost per utilization, also on shipments. And that was not something we’ve built into our plans but when those things occur and our operators conclude that something we need to do, we do it and we did it and that's behind us now.

The Serbian blast furnace reline, which was a major project we've talked about at some length on several calls, that took a little longer and made it into the fourth quarter and that was a slight negative effect. I think those would be the impacts in Europe. I think in the North American market the most important thing… most net worthy that we drew your attention to would be in Canada we had a problem with one of the blast furnaces in mid November and it took roughly a month, not quite, maybe three-and-half weeks to get that furnace right and back up and running. And we effectively lost months worth of production in a two-month period, in a time when the market was otherwise not very strong and so that had a predictable effect both on cost and on results. Those would be the two major things and the overall system of things we operate a good number of furnaces when these things happen, we don't normally bring them to your attention because they are usually offset with other effects and we can try to make do and work around it.

Particularly the one in Canada was something that stands out because it wasn't part of our outlook and we really not any reason... or any way to work around it in such a short notice.

John Hill – Citigroup

Very good. Thank you.

Operator

Thank you. And next we'll go with line of Mike Brothers [ph] of Applebaum Research. Please go ahead.

Unidentified Analyst

Hi everyone, good afternoon.

John P. Surma - Chairman and Chief Executive Officer

Good afternoon.

Unidentified Analyst

In your press release, it seems like you might be suggesting that U. S. Steel Canada's commercial commitments prior to and at the time of the acquisition were priced lower than U.S. Steel prices. Can you give us some color on that?

John P. Surma - Chairman and Chief Executive Officer

Yes, we just wanted point out and make it clear that for a variety of reasons most prominently the fact for antitrust purposes, or competition purposes in Canada that we are not really allowed to know anything about those arrangements until the day of closing and that was really the first venture we had into the commercial arrangements in the acquired company. We are not trying to cast any exposures on what there, the fact is we don't know what would have been reached with those assets as part of a 20 million tone North American company versus a much smaller Canadian only enterprise and we wanted to make it clear that we won't really be able to implement our North American commercial strategy until those commitments are worked off and they are being worked off, it would have been worked off faster had we not had the blast furnace problem I just referred to which caused some of those to carry over in the first quarter. So we just wanted to make it clear that by necessity that process takes some time for our overall commercial approach to take effective measures starting right now.

Unidentified Analyst

All right. Then I guess, what's your sense of U.S. Steel Canada shipments, do you… what do you say are going to be under the new commitment via your U.S. Steels financial policy in the first quarter?

John P. Surma - Chairman and Chief Executive Officer

Probably the majority, but that depends on how well we operate and how quickly we turn things over. So, I would say probably half maybe plus and minus, but that would just be a broad generalization.

Unidentified Analyst

All right. And then you are expecting U.S. Steel Canada's operating rates to increase significantly. I assume, do you have any guidance for I guess for what kind of operating rate you are expecting?

John P. Surma - Chairman and Chief Executive Officer

No, I think we, we referred to the third quarter operating rate of… in Canada it was 89% or 80 some percent or something like that, not in the order of ownership I think we just use that as a data point, but we would certainly be shooting for something at least that go to the first quarter. And in fact I would go so far as to say that we have all of our normally operating U.S. blast furnaces running now including four and Gary and with the market as it is right now we are running pretty hard and intensive.

Unidentified Analyst

All right. Thank you very much for the color.

Operator

Thank you. And next we go to the line of line of Timna Tanners of UBS. Please go ahead.

Timna Tanners – UBS

Hi can you hear me?

John P. Surma - Chairman and Chief Executive Officer

We can hear you Timna.

Timna Tanners – UBS

Okay. Great. Just wanted to comment on or ask about the coal side of the business where there has been sharp increases in spot prices, given some of the global dynamics. I'm wondering if you could please summarize for us your position on coal on Europe and U.S. operations.

John P. Surma - Chairman and Chief Executive Officer

Certainly in the U.S, I will start there, it is a bigger number, and a better number, in the U.S. because we had some contractual commitments that we brought into 2008 is part of our normal policy of trying to have a series or term contracts and because we are in a good position physically on rivers with coal plants close to… reasonably close toward the mine. We generally do fairly well, and I'd say in the US for our overall coal supply ten plus million tons, we would be looking for a single digit increases no more than that in 2008.

In Europe, a little different there, I think the coal market is quite tight and we are exposed more in the spot market and there the increases are likely to be substantial and are likely to be in line with… not exactly what the seaborne trade in coal market is, but much closer to that.

Timna Tanners – UBS

Okay. And when do the US ones re-priced.

John P. Surma - Chairman and Chief Executive Officer

Well, we have a series of contracts that we work on periodically, so there is no magic day where everything turns over. There will be some contracts which will be concluded probably this year I don't have the details right in front of me and some that will go beyond this year into next year and will begin the renew those with other contract. So we try to make… try to encourage some stability in our overall coal costs by having a series of contracts that run for more than one year.

Timna Tanners – UBS

Okay, great and then finally just trying to understand the European market a little bit better, you highlighted a few concerns there and maybe if you could comment on… if the inventory situation from the high import is getting back in line from your assessment, and also the ability that you're seeing to pass through the higher cost on the coal and iron ore side.

John P. Surma - Chairman and Chief Executive Officer

I think, just in general and it is not much different than last couple of years that the European Flat-rolled market looks to be behind what has happened in the US market by a quarter or two. It seems that observable inventories, service centers few other data points we have in Europe are moving in the right direction and may be the peak supply has been worked off and is on the way down, price increases are little more evident now and there seems to be an expectation in the market place that price increases are necessary for cost purposes and achievable based on the current supply/demand. So I think in Europe things look better today than they would have three months ago.

Timna Tanners – UBS

Okay. Thank you.

John P. Surma - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. And next we go to the line of Aldo Mazzaferro of Goldman Sachs. Please go ahead.

Aldo Mazzaferro - Goldman Sachs

Hi John, how are you?

John P. Surma - Chairman and Chief Executive Officer

Hello Aldo.

Aldo Mazzaferro - Goldman Sachs

I just had a question on pricing. I'm trying to get a little bit feel for how the actual trends were in your business I know the mix at Stelco or USSK probably brought you down there, but I am wondering... I am actually wondering if you can just give us, you know, a sense of direction on the U.S. steel and the national plants and on the Stelco plants, you could just tell us if they were sequentially up quarter-to-quarter or down quarter-to-quarter or may be you want to gives us the average selling price?

John P. Surma - Chairman and Chief Executive Officer

I'll take door number two. I think just... let me start again, in Europe, in euros, in Europe our prices bottomed out in the fourth quarter. So… and there were some mixed effect in that, but in general I think our European, euro based on euro zone prices, not in dollar expressed but euro prices were slightly over in the fourth and in the third and some of that was mix, but I think it was just the market varying and bottoming out in the fourth quarter.

In North America, I can't really say anything meaningful about the prices in Canada, because it was such a short period and again not commercial arrangements we are responsible for, but I think the direction there would also be up. In the U.S. fourth quarter versus third quarter on a like to like without getting into much mix, prices were flat to slightly down for the most product groups and now as we've entered into the first quarter, certainly in January, but increasingly through the rest of the quarter prices are heading up in the right direction.

Aldo Mazzaferro - Goldman Sachs

Great. And so go forward on the Canadian business, would you expect the mix to improve or stay more or less, you know, heavy on slabs?

John P. Surma - Chairman and Chief Executive Officer

Improve implies that the current mix is not good, I'm not sure, I prefer to say that I think the mix is what we do it to be and that is a heavy hot-roll, heavy hot-rolled mix that we might have had in the traditional U.S. North American plants, and a certain amount of slab that we are going to either sell as semi finished if that is attractive or finished our U.S. plants, all probably, we will do some or both of that as we develop our overall relationships and new customer positions.

But I think the mix would be relatively similar. There is some [inaudible] but heavier version of hot-roll and some semi finished not 900,000 tons but some portion of that, and we'll have to decide really month-to-month and quarter-to-quarter how much of that we want to do. It's not really easy market to get in and out of because of even with semi-finished the receiving party wants to have some understanding of what the material is and how it runs, it will take some time to develop those relationships, but we'll have I think, probably a stable mix through the earlier part of the year as we further the process.

We're already running some Canadians slab through U.S. hot strip mills and it works just fine, and I think that gives us new opportunities to get the new customers we are not able to get before. So, we are just exploring all those opportunities and we seeing many good things in front of us. But the overall mix near term, fairly similar.

Aldo Mazzaferro - Goldman Sachs

All right John, I didn't mean the apply was the bad mix, I met less rich. Can I ask one more question on the Tubular, kind of the same question, I see the mix improved in the fourth quarter. Could you talk about the mix going forward in Tubular?

John P. Surma - Chairman and Chief Executive Officer

Yes. That’s a very fragile calculation Aldo, because the price range is on what we sell are quite different and just expressing it as an average price per ton can be quite affected by weather there's a big order of wide diameter casing for the deep gulf, when that happens the prices are very high and really effected. I think overall, we've had a number of price increases both late last year and just more recently... either later last year, early this year where over the entire range of products we expect to see some price movement for no other reason than to try to recover some of the higher cost.

But, I think there, our mix should be fairly stable in near-term, our mix is strongest right now in the narrower smaller diameters, not as strong in the very wide diameter casing, which is deeper Gulf kind of projects that drilling [inaudible] still fairly weak, has been really since the hurricanes came through several years ago. The hurricanes didn't blow the deposits away, they are still there. And we hope eventually that the rigs are going back and we begin to drill there and that mix will improve. But in the meantime, the mix can do... be affected by a lot of things, it is a long interim story, but, I would say, the near-term, it probably stays relatively stable.

Operator

Thank you. Next with us in the line is Michael Willemse of CIBC World Markets.

Michael Willemse - CIBC World Markets

Hi great. Thank you.

John P. Surma - Chairman and Chief Executive Officer

Hi Mike.

Michael Willemse - CIBC World Markets

Hi John. Could you... just going back to the issues of the Canadian operations, is it the Hamilton mill or the Lake Erie mill. I might have missed that.

John P. Surma - Chairman and Chief Executive Officer

You didn't because I didn't say it but I would say it was the Lake Erie plant. We had a couple of blips at Hamilton, but the largest issue that I mentioned was at Lake Erie.

Michael Willemse - CIBC World Markets

Okay. And when was the last outage taken at Lake Erie, was it quite a while ago?

John P. Surma - Chairman and Chief Executive Officer

Yes. I think both the furnaces are in pretty good shape. This was just an item, which could happen at any, furnace that has at another places, it just happened on the wrong time and took a lot of good fix. But, I don't want to make it too very specific, it happened we take care of it, and we go on. But furnaces are in pretty good shape.

Michael Willemse - CIBC World Markets

Okay. Okay, And then, just going back to the guidance. Particularly, U.S. Steel Europe, if I look at the investor package, calculated cost per ton in the fourth quarter in Europe was $691. So, should we assume that the cost will be up in the first quarter of 2008 or higher than $691?

John P. Surma - Chairman and Chief Executive Officer

Of course, those figures are affected by the dollar/euro relationship, But Just an after [ph] yes I think costs are higher likely to be higher in the first quarter in Europe not just for us but probably for everybody but certainly for us for our use and for carbon use in particular. So, we would expect some price increases in the first... I am sorry cost increases in the first quarter and we are running after price increases to, we hope more than recover that. How quickly that happens remains to be seen as the quarter goes on.

Gretchen R. Haggerty - Executive Vice President & Chief Financial Officer

I think John, that from a… pricing and volume improvements we're expecting, we do expect an improvement. The costs would be higher but no long partially offset those.

John P. Surma - Chairman and Chief Executive Officer

Right. Higher operating rates are going to give us [inaudible].

Michael Willemse - CIBC World Markets

Yeah actually that was my point. So, you do expect a higher operating rates to offset the higher... I guess which one will offset more with a higher operating rate cost to decline more than raw material cost or the other way around?

John P. Surma - Chairman and Chief Executive Officer

Not likely. I think it would be the other way around.

Gretchen R. Haggerty - Executive Vice President & Chief Financial Officer

Right.

Michael Willemse - CIBC World Markets

Okay. And also just a one question on… going back to North America, how far out would you see your order books are now?

John P. Surma - Chairman and Chief Executive Officer

Four or six weeks may be something along those lines. The lead times have been extending recently. I think that is a positive sign and that goes hand in hand with price increase.

Michael Willemse - CIBC World Markets

Okay thank you very much.

John P. Surma - Chairman and Chief Executive Officer

Thank you Mike.

Operator

And next we will go to the line of Evin Hertz [ph] of Morgan Stanley.

Unidentified Analyst

Hi good afternoon.

John P. Surma - Chairman and Chief Executive Officer

Hi Evin.

Unidentified Analyst

I know we have talked about a lot already, but going back to the outages, I was hoping you could quantify from a cost perspective, what were you looking at in 1Q versus what happened in 4Q and if there is spill over effects that are going to bleed into the first quarter?

John P. Surma - Chairman and Chief Executive Officer

Effects in the first quarter from the outages per se, I don't think there is anything significant coming out of that and the only derivative of that would be that some of the customer commitments in Canada that we were working our way through will take a little longer to work through because we couldn't get all the tonnage out and to some degree like wise in Europe were we had some service interruptions with this railway strike issue, some of those tons took longer to get out and that will take a little longer than it get things move through the system, but the outages per se cost lingering into the first quarter, not really.

Unidentified Analyst

Okay any specifics on numbers, tonnage or cost?

John P. Surma - Chairman and Chief Executive Officer

You mean cost increases?

Unidentified Analyst

As far as the outage cost or outage tons in fourth quarter versus first quarter?

John P. Surma - Chairman and Chief Executive Officer

I think, we have kind of given you the operating rates. I mean, the outages were largely the reason for the change in operating rates. From that you can derive... we have the table with production and shipments on. And I think that is the best expression I can give you. I think the steel capability... steel production was affected by the outage the difference from the third quarter would be the best way to measure that.

Unidentified Analyst

Okay. I will move on. My other question was on the new galvanizing line in Europe. I am wondering what… may be an update on that, the status? And what percent increase would that... what percent of the increase that we are looking for in Europe in the first quarter, it might be due to higher ASPs from a mix with more galv?

John P. Surma - Chairman and Chief Executive Officer

The first part of your question, the new line is running very well, it exceeded all the start up curves and our target production for 2007 was exceeded in nice amount, not huge but a nice amount. So the plant is running very well. And we are into exposed automotive trials and we are selling into the appliance market and selling into the higher-end of the construction market. So the line is running fine. The margins are quite good and no doubt that will be a positive contributor. In the first quarter, it really wasn't running in the first quarter last year, how significant that depends really how well the galvanized pricing does, so I'm reluctant to predict that. But it'll be positive for the first quarter because it wasn't there last quarter, first quarter last year.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. Next we'll go to the line of Mark Parr of KeyBanc Capital Markets.

Mark Parr - KeyBanc Capital Markets

Thanks very much.

John P. Surma - Chairman and Chief Executive Officer

Hi Mark.

Mark Parr - KeyBanc Capital Markets

Hi John, how are you doing?

John P. Surma - Chairman and Chief Executive Officer

Good.

Mark Parr - KeyBanc Capital Markets

Could you give us some color on your spot mix for your US operations as opposed to Stelco for… as we move into '08.

John P. Surma - Chairman and Chief Executive Officer

Sure. We generally talk 50-50, it won't differ by much. I think if you look at the actual capital sea contracts with fixed price for the year, that's probably 40% of our total US, non-Canadian Flat-roll book and at least 40% is spot, which is 30 days, maybe a bit longer. And there is an intermediate component there that may be has a slightly longer contract period, six months and some that would also be index based on, CRU or some other index and most of that would be monthly index, some a little bit longer. So the actual fixed pricing fees, less than 50%, some form of spot related a little more than 50%.

Mark Parr - KeyBanc Capital Markets

All right. Are there any raw material escalators in the fixed price contracts for '08?

John P. Surma - Chairman and Chief Executive Officer

Not of any significance, no. I mean, I'd just respond to that, I mean Dick [ph] is one thing that because of it's extraordinary volatility in the last several years, we have some provisions in some contracts to deal with that. I would just say Mark, with respect to US fixed-price contract business, we had a decent idea of what our costs were going to be for 2008 when we had our contract price negotiations for those, we had negotiation for 2008.

Mark Parr - KeyBanc Capital Markets

Okay. And so at this point while you're not seeing any surprises on cost side relative to where you were when you were doing the negotiations?

John P. Surma - Chairman and Chief Executive Officer

Not really, no. Maybe the one slight exception would be scrap, the really big move in scrap and alternative iron units that occurred late in the year was maybe a little beyond our expectations that has other favorable benefits on the overall market, maybe it is not such a bad thing from our standpoint, but that would be the one exception that moved up at a very rapid, very high level and that would be, maybe the one footnoted on it.

Mark Parr - KeyBanc Capital Markets

Okay. Just I could ask another question about Stelco, once you closed the transaction you are able to get in there you discovered this one issue with the one blast furnace, your do diligence till date have you uncovered any other potential significant capital projects or also could you rank the Stelco blast furnaces from a productivity standpoint against your North American standards?

John P. Surma - Chairman and Chief Executive Officer

Sure, it's still a little soon to do that because we are doing a lot of evaluation and examination, but blast furnaces is a pretty good size and blast furnaces were in a pretty good shape, they have been work done on in a last several years and both furnaces are running well, this one problem didn't take much cover because it was sort of a [inaudible].

Mark Parr - KeyBanc Capital Markets

Okay.

John P. Surma - Chairman and Chief Executive Officer

So, I mean that was so much of an investigation, it was more a [inaudible] so, I think everything we've since then are... tell us there is lots of opportunities for optimization improvement, our objectives for operating rates for the entire item, really the blast furnaces co-plants and blast furnaces and steel shops are quite high, higher than the operating rates that would have been relevant there in the past. So, we think we can do a lot better on throughput that has been, if its on cost and we're hard at it right now with also all sorts of people.

Mark Parr - KeyBanc Capital Markets

All right. And just lastly, Gretchen could you review the total pension and OPEB, P&L impacts in '08 and '07 just give me those numbers again please?

Gretchen R. Haggerty - Executive Vice President & Chief Financial Officer

The total in '07 was $266 million in 08 we're expecting the total to be approximately $200 million, of that $200 million amount $140 is OPEB and $60 is pension.

Mark Parr - KeyBanc Capital Markets

Okay. Terrific. Thank you, very much.

John P. Surma - Chairman and Chief Executive Officer

Thanks Mark.

Operator

And next we will open the line of John Tumazos [ph] of Avery Independent Research [ph]. Please go ahead.

Unidentified Analyst

Congratulations on all the integration and acquisitions.

John P. Surma - Chairman and Chief Executive Officer

Thanks, John we're trying hard.

Unidentified Analyst

If I am counting you right you now melt steel at nine locations and there's a half of those in other operations that not have steel making furnaces that are significant like Lone Star or Portage in you operation, could you describe, how you're reporting or can you command and control has changed over the last decade, when you have... when you got down to the low point of three steel making operations Gary really dominated the Fairfield and Lawn [ph] valley operations as to significant. And just wondering how you manage it all?

John P. Surma - Chairman and Chief Executive Officer

That's a really good question John, because we spend a lot of time on that subject and I will just give you quick historical perspective. If you think about the old U.S. Steel from sort of year 2000 we were 10 million tons plus or minus and now we are 30 some million. So it's a much bigger operation than we dealt with back in those days and in North America it's 20 some versus just 10 back then.

We do have a lot more facilities, we move a lot of product around, and we source lot of different things, What we discovered when we added National Steel back in mid-2003 that it set up all sorts of opportunities for sourcing interplant operations, what's the best way to source Midwest. Well, that depends upon what's the substrate dimensions are, it depends upon what the load is on Gary versus Great Lakes, it depends up on transportation rates. So we went through sort of round one of figuring all that out. Also on the outbound side what's the best location to source the customer from because there can be choices when you have more facilities.

It took several iterations for us to get that more or less right. We still work on it everyday. But that was a process that took a little bit of time. Now we have added a big demand factor in the southern end of our system in East Texas with 900 and some thousand tons of consumption and a large source of semi finished with 900 some thousand tons on the northeastern end of our system and we are busily figuring out the optimization of that responsibility rest in our corporate business planning function together with our corporate marketing function trying to figure out where the most margin is given a certain set of market assumptions based upon what we make and where the customers are, how we can process it.

It's a very complex process and bringing in the new operations last year to the South and to the North has made it more complex but also have opened up huge opportunities for us and we are busy on that right now. So I wish I could give you a big [inaudible] exactly how it work but we are working on it right now.

Unidentified Analyst

Whom do the nine plant managers report to in the melting operations and how many layers are there between you and them?

John P. Surma - Chairman and Chief Executive Officer

There is only a couple layers left, fewer than it used to be, but our general managers at the plants report to Vice President of Operations who reports to our Chief Operating Officer who reports to me. I guess that's the simplest way I could describe it. They are responsible for any plan, necessarily not for selling and market.

Unidentified Analyst

Thank you.

Operator

Thank you. And next we will go to the line of Dave Martin of Deutsche Bank.

David Martin - Deutsche Bank

Thank you. I have couple of remaining items. First of all, coming back to Michael's question on European costs in the first quarter, did you conclude that accounting for the raw material cost and then the increase in operating rates that your cost will effectively be consistent with fourth quarter, cost per ton?

John P. Surma - Chairman and Chief Executive Officer

Yes, it may... we don't know for sure yet but maybe one of the positive, I will give you that we might lower outage cost in the first quarter than the fourth quarter because again we don't have any expectations of outages right now. So we have some positive higher rates as well, but higher material cost and it could go either way but I would expect right now that our overall cost per ton like-to-like say mix probably would be a bit higher.

David Martin - Deutsche Bank

Okay. And how about in North America?

John P. Surma - Chairman and Chief Executive Officer

We would be maybe higher but more stable. I think again the outage cost would be lower and the absolute cost increases for other items will be relatively lower. Scrap will be higher, gas could be higher typically as this time of the year, iron relatively flat, coal relatively flat, purchased coke would be quite a bit higher, so and then it could to go either way, but I would say the costs in the U.S. will be more stable than they would be in Europe.

David Martin - Deutsche Bank

Okay. And then secondly, coming back to the discussion on contract prices, specifically auto contracts, I think back in October, you had highlighted that the potential existed for significant price increases for '08, could you just update us on that?

John P. Surma - Chairman and Chief Executive Officer

I am not sure. I said that we are going to get any of that, let me just say that when we went through our normal contract negotiations we had a pretty good idea of what we... had our cost. We had a good idea of what our cost were expected to be and we went through those discussions expecting to at least maintain if we could improve our position, that’s a market process, competitive process and we are comfortable with where we came out.

David Martin - Deutsche Bank

Okay. And then lastly, I think Nick mentioned when going through the CapEx budget for '08, mentioned some mining CapEx and could you give us kind of the magnitude of that CapEx and what exactly you are doing?

John P. Surma - Chairman and Chief Executive Officer

I don't have the exact numbers, may be Nick can flip to some if we know them, but they are not huge numbers. And they are largely just normal replacement equipment. There is no new projects there, although I think we are giving some attention to that because our iron requirements are a little higher now or will be overtime with the Canadian operation. So, but these are just largely replacement equipment global equipment, trucks, drills shovels and the like. And then I would, I am nor sure but I am guessing less than $100 million more like $ 50 million.

David Martin - Deutsche Bank

Okay, thank you.

Operator

Thank you. And next we will go to the line of Marty Pollack of NWQ Investment Management.

Marty Pollack - NWQ Investment Management

John, a quick question one. As far as USSK, when you look at last year's quarter, I mean, the January quarter of '07, you shipped about 1.650 million tons, 98% operating rate, average price was about $659 a ton and you generated profits by $206 million, bring that only a context to try and understand assuming we get the operating rate back to some level that would be clearly addressing levels that beyond the outage problems you had. What kind of operating rate can we expect and where those headwinds are cost, I mean are we, should we be looking for a profit level somewhere between this $85 million and $200 million that you guys generated in last year's… yours first quarter? I am trying to understand sort of the context here.

John P. Surma - Chairman and Chief Executive Officer

Sure. Just a couple of observations Marty. Number one at least in the first half of the year, I don't… we don’t not expecting to have any large outages so, assuming the market is reasonably supported. We would be running at pretty high rates and capability utilization rates would be, maybe more back to where they were in the middle part of last year and that could be well in to '90s. We had a quarter or two maybe we ran 100%. So, I think that's within the possibility of the market would support it that have certainly some cost benefits, what we are getting though I think are more substantial raw material increases being influenced by the overall world trading patterns from iron, ore, and coal not exactly the same amounts, but moving more in that direction and the real question is whether or not we can move prices far enough, fast enough to more than offset that well our profitability likely to be between somewhere compared to where we were in the fourth quarter and we were back in other quarters. Probability, I think that's not a bad assessment that we would land in there it's that hard to say Gretchen I think you want to add to that?

Gretchen R. Haggerty - Executive Vice President & Chief Financial Officer

Yeah, I guess I just say given the cost pressures and we anticipate getting squeezed a little bit in the early part as we try to get some price increases. And so, we'll see the cost as faster than we see the prices. So, I think, Marty, in between, there is right, but I think we are coming up from the fourth quarter, we are not going to do until where we were at the first quarter of '07.

John P. Surma - Chairman and Chief Executive Officer

The trajectory we are on is a positive one how quickly we would get back into those and the profitability depends on how quickly the market will respond on the price side.

Marty Pollack - NWQ Investment Management

Well, I think that may been a peak level anyway. So, I think in a sense I don't think one would expect that, but if the outages have such a significant impact and your operating rate was so low, it seems that maybe one would want to get comfortable that nominal profits in this quarter where considerably lower than what would be normalized and maybe that's two way to hope to see that in terms of how you might describe that?

John P. Surma - Chairman and Chief Executive Officer

Yes. Marty, I think really all depends on the raw material cost price relationship, and I think everybody is making Flat-roll in Europe, has that same question, the overnight reports from the trade press suggests that some other manufacturers were talking about the need to try to address that issue and we will be doing the same thing. [inaudible].

Marty Pollack - NWQ Investment Management

Okay. What seems to be also here is some tail wind, I think that you’ve laid out, I add up the numbers $200 million on synergies another $66 million on pension and OPEB, and another $25 million you already described also in benefits. I think that was the numbers you said were USSK savings on this retirement. Curious one, what have you seen in terms of savings out of the Steel Dynamics at this point towards that $100 million of synergies by '08. And in fact can we expect these to be tail winds to your results on some levels so that we actually capture the benefits of these synergies and offsetting the cost you're talking about?

John P. Surma - Chairman and Chief Executive Officer

That's a very fair question Marty. Our commitment is to deliver with respect to the Canadian assets, the Stelco acquisition, at least $100 million of annual repeatable synergies by the end of the year. So we'll be hitting a run rate and I think it will be more back end loaded as we go through our process and that's the way it normally works and I am thinking back to the national acquisition the Serbian acquisition etcetera. So I think there is a nice tail wind there. We expect to amend that in our overall results, but it'll be loaded more towards the back end.

Marty Pollack - NWQ Investment Management

And as far as the Stelco integration, I should well assume that your comment suggest the integration while you expect to work by year-end is in fact more labor to a slower to develop online with fewer schedule?

John P. Surma - Chairman and Chief Executive Officer

No, not really. Let’s just remember, we only closed the acquisition on October 31, so its not been all along, its been less than three months and we have a very detailed plan with lot of people working on it. And we are going through it step by step and we start with safety and we installed systems and we installed people and we installed support groups to work on coke plants and blast furnaces and steel shops and we begin the develop our commercial strategy and that doesn't happen in two months, it happens over some period to time. And this feels a little bit to us... to me at least like late 2003, early 2004 because we had come through the national acquisition about mid-year 2003 and really didn't get to where things started click until mid-year 2004. I think that we can do faster than that. But I think expecting us to have it done in three months is pretty tall order, I think we are making it progress, it is on schedule.

Operator

Thank you. Next we will hear from the line Charles Bradford of Bradford Research.

Charles Bradford - Bradford Research

Good afternoon.

John P. Surma - Chairman and Chief Executive Officer

Hi, Chuck.

Charles Bradford - Bradford Research

In the last conference call, you would just... I think and thanks to with a change in the cap-and-trade system in Slovakia and I think you didn't know at that point how much of the reduced Slovakia emission [ph] you been allocated and also what alternatives you have. Does any more information come out of what they going already have or what you are going to do about it?

John P. Surma - Chairman and Chief Executive Officer

We have some anecdotal reports, Chuck, that not anything final yet to the best of my knowledge and believe. What we're going to give on our 10-K filings sort of an up to the minute specific disclosure of everything we know at the time. We had some lawsuits and there has been some actions there that wasn't to our satisfaction.

But based on what we've heard so far from the Slovak level in these discussions, we feel little more comfortable that we're going to able to get an allocation that together with improvements we are making in our overall system that we will be able to operate at high levels of capacity without large costs for additional carbon based requirements, that’s in the current system, that doesn't speak to what comes in the next round of CO2 reduction that the... he was working on. You can read about that everyday of course we have pendings on that, but in the current system, it looks like we should be in a position where we will able to navigate our way through this without major negative costs.

Charles Bradford - Bradford Research

The iron ore situation in Slovakia, obviously it is not on the order, but would it be based on the necessary seaborne price obviously without the price. What kind of pricing basis do you have and how close are you going to be to the 75% demand that CVRD is apparently making?

John P. Surma - Chairman and Chief Executive Officer

Well, we buy our own units almost exclusively from the East Ukraine and Russia; we have a number of suppliers we've had excellent long-term relationships with. And that is a normal market negotiation and they have small alternatives, we have some alternatives and we try to settle lot of the price that we can both live with or that we are both equally unhappy with maybe. And I think in this particular instance, we... I expect this to be below what the seaborne resolution is. I don't have a particular guess at that, I'm just looking at the reports that looks like you right. And my guess is we're going to come in underneath that for the year but that remains to be seen on how high that settlement would be. So we really not directly in that, but no doubt those that we're buying from have pretty good knowledge of what that discussion entails and so do we.

Charles Bradford - Bradford Research

Thank you very much.

John P. Surma - Chairman and Chief Executive Officer

Thanks, Chuck.

Operator

Thank you and next we go to Ted Izatt of Bear Stearns.

Ted Izatt - Bear Stearns

Hi, good afternoon everybody, congratulations on your quarter.

John P. Surma - Chairman and Chief Executive Officer

Thank you.

Ted Izatt - Bear Stearns

Couple of questions here. First of all, have you given any guidance or could you give any guidance in terms of free cash flow for '08 and whether I actually where I am really get… whether you might come to the debt markets again?

Gretchen R. Haggerty - Executive Vice President & Chief Financial Officer

Well, I guess I don't have any immediate plans to access the debt markets right now but we did... we have done a fair amount of financing over the last year in conjunction with our acquisition. And I felt pretty comfortable with the level of financing that we have done not wanting to have too much long-term fixed rate debt and wanting a nice balance with some shorter term debt that we could pay off quickly with free cash flow generated. So I think we are pretty comfortable with where we are and the financing that we've done. We don't really give a free cash flow forecast for the year. We have given new you some pieces of things that are higher than they were last year but we obviously are expecting some favorable effects from our acquisitions overtime. So I think overtime, we are hoping to generate favorable free cash flow because I don't think I could give you a forecast.

Ted Izatt - Bear Stearns

Okay. And then that would be used towards debt reduction. Correct?

Gretchen R. Haggerty - Executive Vice President & Chief Financial Officer

Yes. And I guess one, as a matter of fact, one of the things it's not easy to see from our earnings release but I did tell you last quarter, that when we finance the Stelco acquisition we drew about $400 million on our accounts receivable facility, the receivable sales. So it doesn't appear on the balance as debt, but there is lots of detail in the foot notes that allow you to see that and it is really a financing vehicle, but we drew $400 million and at the end of the year you will see from our 10-K when we file it, we are down to $150million there, so we already have in a way reduced some of the financing that we arranged for the Stelco acquisition.

Ted Izatt - Bear Stearns

Okay great. And then as far as your credit ratings go, are you fairly comfortable where you are at? Would you be trying to improve the one non-investment grade line or?

Gretchen R. Haggerty - Executive Vice President & Chief Financial Officer

Absolutely we are hopeful to continue to demonstrate strong financial performance that will… warrant [ph] having their enforced rate of investment grade, I think that’s absolutely an objective for us.

Ted Izatt - Bear Stearns

Okay. Thank you Gretch.

John P. Surma - Chairman and Chief Executive Officer

Thank you.

Operator

Thank you and I'll turn it back to our host speakers for any closing comments.

Nick Harper - Manager of Investor Relations

We'd like to thank everyone for participating and we hope to talk to you soon. Thank you.

Operator

Thank you. And ladies and gentlemen this conference will be available for replay after 5 PM Eastern Time until February 5th at midnight. You may access the AT&T executive playback service at any time by dialing 1-320-365-3844 with the access code of 905397.

That does conclude your conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

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Source: United States Steel Corp. Q4 2007 Earnings Call Transcript

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