Key Trends Impacting U.S. Steel
U.S. Steel (NYSE:X) continues to see tough times, with profits evading the tenth largest steel producer in the world again this quarter. The company reported losses of $86 million for the first quarter of 2011, although sales figures have improved by almost 13% over the value in the last quarter of 2010. [1] U.S. Steel competes with international steel giants like ArcelorMittal (NYSE:MT), BaoSteel, Posco (NYSE:PKX), Nippon Steel and ThyssenKrupp.
U.S. Steel is an integrated steel producer of flat-rolled and tubular products with major production operations in North America and Europe, with annual raw steel production capability of 31.7 million tons. Our price estimate for U.S.Steel stands at $53.36, implying a premium to market price.
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Below we highlight 3 industry trends currently affecting the global steel industry in general, and U.S. Steel in particular.
1 – Increasing Demand from Developing Markets
Countries like China, India and Thailand, due to rapid growth, are driving the increased demand in steel. Major players in the steel industry are expecting to see a 8-9% rise in demand in South East Asia within the next year and an overall 4% increase in demand from Asia. This growth in demand should help benefit the steel industry in terms of pricing, revenues and margins.
2 – Overcapacity in the Steel Industry
The global steel industry has been facing the issue of over capacity. Most installations have been running at 70% of their installed capacity. As the global economic downturn took place, the steel industry was one of the worst hit as demand for manufactured steel products and raw steel pipes and sheets fell. As economic growth picks up we expect demand to improve.
3 – Higher Fuel Costs Will Increase the Production Cost of Steel
The cost of crude oil has fluctuated a lot in the recent past from a high of $150 per barrel to a low of $35 per barrel in 2009 before rising to nearly the $100 per barrel currently. As demand for steel rises, prices of raw materials that go into the production of steel for instance crude oil are expected to rise, leading to higher production costs. This in turn will force companies to increase prices for steel products.
See our full analysis for U.S. Steel stock here
Notes:- U.S. Steel First Quarter 2011 earnings release, U.S. Steel Press Releases [↩]