(Adds more CEO comments, closing stock price)
By Steve James
NEW YORK, Jan 29 (Reuters) - U.S. Steel Corp (X.N) said on Tuesday that fourth-quarter profit dropped sharply and the first quarter would continue to reflect volatile costs and pricing, sending its shares down as much as 9.6 percent.
Fourth-quarter net earnings fell to $35 million, or 29 cents per share, from $297 million, or $2.50 per share, a year earlier.
"It was lower than the third quarter and lower than we had expected," Chairman and Chief Executive John Surma told Wall Street analysts on a conference call.
He said quarterly earnings, which were well below analysts' expectations, were hurt not only by planned and unplanned production outages but by a work-force reduction charge for its Slovakia operations and inventory adjustments.
Sales rose to $4.54 billion from $3.77 billion.
"It was a weak quarter, much weaker than expected," said Michelle Applebaum, a steel analyst in Chicago. "The cost pressure was fairly significant, and they have a big challenge at Stelco."
Operations at Stelco, the Canadian steelmaker acquired last year, were not factored into fourth-quarter estimates, Surma said.
Looking ahead, he said, "We expect first-quarter results to continue to reflect the volatile cost and pricing dynamics in our three major segments."
The company was "cautiously optimistic" that U.S. shipments would improve in 2008.
"I think they (the results) surprised everybody," said analyst Mark Parr of KeyBanc Capital Markets. "A number of issues impacted the fourth quarter."
He noted that in addition to production outages, results at Stelco "look weaker than they thought."
But Parr said the company's outlook was encouraging as far as steel shipments and higher pricing were concerned, although that would be offset by higher raw material costs.
Its shares closed down $7.49, or 6.8 percent, at $102.58 on the New York Stock Exchange after falling as low as $99.51 earlier in the session.
Analyst Applebaum upgraded U.S. Steel to a "buy" rating on the basis of an upside for steel prices.
Net income was reduced by $117 million, or 98 cents per share, due to the inventory transition effects and work-force reduction in Slovakia.
Excluding the items, earnings were $1.27 per share, Surma told analysts. On that basis, the analysts' consensus was $1.44 per share, according to Reuters Estimates.
Surma said the company sees improvement in the flat-rolled segment as shipments and operating rates are expected to increase. It also cited its acquisition of Stelco and completion of blast furnace maintenance projects.
"Prices are also expected to be higher as increasing spot market prices will be realized throughout the quarter," he said. "We also expect significant cost increases for raw materials, particularly for purchased scrap, coke and alloys."
For U.S. Steel Europe, Surma expects higher euro-based prices, while shipments should increase as a result of higher facility availability in the first quarter.
But escalating raw material costs are expected to partially offset the improvements. Surma said he was looking at single-digit price increases for coking coal in North America, but substantially higher increases in Europe. (Reporting by Steve James, editing by John Wallace/Jeffrey Benkoe)