Coverage Launch: $60 Trefis Price Estimate for U.S. Steel

U.S. Steel (NYSE:X) is an integrated steel producer of flat-rolled and tubular products with major production operations in North America and Europe. It is currently the tenth largest steel producer in the world, with an annual raw steel production capability of 31.7 million tons. The company competes with international steel giants like ArcelorMittal (NYSE:MT), BaoSteel, Posco (NYSE:PKX), Nippon Steel and ThyssenKrupp.

Launch of Coverage on U.S. Steel; $60.22 Price Estimate

We recently launched coverage on U.S. Steel with a $60.22 price estimate for the company’s stock.

We have broken down our analysis of U.S. Steel into four business segments:

1. U.S. Flat Rolled Steel
2. European Flat Rolled and Tubular Steel
3. U.S. Tubular Steel
4. Other Business

Global Steel Industry

The steel industry is believed to be an indicator of economic progress, because of the direct use of steel in infrastructure development. Over the last decade, there has been an annual growth of almost 10% in global steel production, except during the recession in 2008-2009. This sustained growth in steel production has been almost single-handedly fueled by China. From being responsible for less than 20% of the world’s steel production in 2003, China today contributes to almost 45% of the steel produced.

The worldwide total production of steel in 2010 was more than 1.4 billion metric tons, of which more than 600 million metric tons were produced by China. ^[1] As other developing Asian countries like India and Thailand also show healthy economic development, the steel industry is expected to continue to grow at around 10% in the next few years.

It is important to note that the global steel industry is witnessing an over-capacity problem. Most of the steel mills are running at about 70% of their rated capacity, which indicates that steel prices will not see a significant uptick in the near future. Moreover, the low profit margins in the steel industry due to extensive competition also suggests that prices will not show a sharp decrease.

See our full analysis and $60.22 price estimate for U.S. Steel

U.S. Steel’s Niche

U.S. Steel’s flat rolled steel division in the U.S. is its most valuable segment, contributing more than 63% to our estimated stock value for the company. This segment represents the company’s sale of flat rolled steel to its customers in the United States. This includes steel plate products used for ship building, construction, large diameter welded pipes and boiler applications, as well as strip products used in automotive body panels and domestic white goods. ((About Steel, World Steel Association))

U.S. Steel has a competitive advantage over other steel manufacturers like ArcelorMittal and Nucor in the U.S. due to its long-standing relationship with the biggest players in the automobile industry. Sales to major American automobile companies including GM, Ford and Chrysler constitute almost 20% of the division’s sales.

We believe that the sales by this division will continue to grow at an annual rate of 10% through the end of our forecast period, contributing a major chunk of our estimated value for U.S. Steel’s stock.

1. World crude steel output increases by 15% in 2010, World Steel Association, Jan 21 2011 [↩]