Commodities

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

As you know, this week has been defined by the sudden departure of an authority figure under dubious circumstances.

That's right: United States Steel Corp.'s CEO is out.

Late on Wednesday, the company announced the "retirement" of Mario Longhi, who joined U.S. Steel in 2012 as chief operating officer and became CEO in 2013. According to the press release, having "envisioned a five-year tenure," Longhi was now heading off. What could be more straightforward?

Except, like that other high-level exit you may have read about, there's a little context here.

First, consider U.S. Steel's delay: Longhi stopped being CEO on Monday, but the announcement didn't drop until late Wednesday. The company declined to comment as to why.

But it's fair to say the retirement of a CEO usually happens with a degree of planning, and even signalling, to ensure a smooth succession. Stepping down on a Monday with a two-day hiatus before it's made public appears to not quite fit this mold. As Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, put it to me on Thursday: "A surprise retirement raises eyebrows."

Second, Longhi's departure came approximately two weeks after U.S. Steel's disastrous quarterly results, which prompted a 27 percent plunge in the stock price that day.

Context
Longhi's departure follows a dramatic drop in U.S. Steel's stock
Source: Bloomberg

I'm going to go out on a limb and suggest there's a possibility these two events are linked.

The question now is what Longhi's departure means for the stock.

On the face of it, not much. As of this writing, the shares had reacted by falling very slightly on Thursday morning (curiously, at just under $21, they are almost exactly where they closed the day Longhi joined the company).

The market's desultory shrug likely reflects two things: Longhi's legacy and the identity of his successor, COO David Burritt.

Longhi's signature initiative was "The Carnegie Way" -- essentially an effort to overhaul U.S. Steel competitiveness and enable it to better withstand this industry's inevitable cycles. It was the right thing to do. Unfortunately, progress on margins has been hard to discern:

Net Effect?
After almost 4 years of streamlining, it is hard to see a step change in U.S. Steel's net margin
Source: Bloomberg
Note: Trailing 4-quarter adjusted net income margin. Data for 2Q 2017 onward are implied by consensus estimates.

The latest results announcement served as confirmation. Not only did U.S. Steel miss earnings forecasts by a mile and slash guidance, it attributed this to an accelerated effort to invest further in its facilities. Implication: It would effectively miss out on the latest upswing in steel prices and raise spending for several years to come.

Longhi's attempt to ameliorate investors with the prospect of protectionist measures being enacted by the Trump administration, thereby juicing domestic steel prices, wasn't convincing. His expectations of continuing robust steel demand also met with skepticism (and rightly so, judging from the automotive industry's woes). The company's earnings call was notable for the level of confusion among analysts over timing, the changes in guidance, where the extra spending was going and what the benefits would be.

If that call made it clear U.S. Steel's overhaul still has a ways to go, it also appeared to commit Burritt, Longhi's successor, to seeing it through. He said several times on the call that it required "courage" for U.S. Steel to take these actions now, despite the costs involved. There's no indication he has changed his stance.

It is hard to argue with the idea that reversing the apparent underinvestment in U.S. Steel's plants -- at least judging from its capex ratios -- is the right thing to do for the longer term. The problem is that, already several years into fixing itself, U.S. Steel's long term has lengthened further -- and, crucially, the company has sprung this on investors in a way virtually guaranteed to eviscerate confidence. Longhi's sudden exit is merely a consistent coda to that.

If Burritt is to actually persuade the market to trust management again, then the shocks must end here. The problem? While Longhi's exit might on one hand have served to clear the decks, its hurried nature also raises a question as to whether there are more surprises to come.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net