Higher Steel Prices Make U.S. Steel Stock Worth $60

U.S. Steel (NYSE:X) competes with international steel makers like ArcelorMittal (NYSE:MT), BaoSteel, Posco (NYSE:PKX), Nippon Steel and ThyssenKrupp. The average selling price of U.S. Steel’s flat rolled steel products in the North American region has been volatile during the period 2007-09, as demand was high in 2008 that led to an increase in average price. However in 2009 prices declined sharply as a result of the fall in demand during the economic recession.

As the global economy rebounds, demand for steel products should pick up, which should in turn increase prices. The increase will however be gradual because of the excess capacity that exists within the steel industry and slow growth expectations in the majority of the developed world.

While we anticipate U.S. Steel’s average price of flat rolled steel products will increase to $738 by the end of our forecast period, Trefis members predict the price will cross $800, representing an upside of around 5% to our price estimate for X stock.

We currently have a Trefis price estimate of $60.17 for U.S. Steel’s stock, about 11% above the current market price of around $54.

Over Capacity in the Steel Industry

The steel industry of late has been marked with the problem of over capacity. Most of the steel mills have been running at 70% of their capacity. With already low margins, it is unlikely that prices will fall any further. At the same time, we do not expect prices to increase sharply due to the over capacity issue.

Increasing Demand from Developing Nations

As developing nations like China, India, Thailand and other South-East Asian countries witness healthy economic growth, demand for steel in these regions is expected to increase at around 10-11% in 2011. Meanwhile demand from developed countries will remain subdued. The steel industry’s emergence from the shadows of the global recession is evident. Despite the $111 million operating loss reported by U.S. Steel in 2010, we believe that the company’s flat-rolled steel operations in the U.S. will continue to be its biggest source of value in the years to come. (See: U.S. Steel Records Loss in 2010, but Good Times Lie Ahead)

An imminent recovery in the global demand for steel, and the expected economic growth among developing countries like China, India and South Korea, steel prices will allow manufacturers to push steel prices further up.

Trefis Community Forecast

Trefis members forecast the average price (per tonne) of U.S. Steel’s flat rolled steel product will increase from $712 in 2011 to $803 by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from $689 to $738 during the same period. The member estimates imply an upside of 3% to the Trefis price estimate for U.S. Steel’s stock.

See our complete analysis for U.S. Steel.