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Investment Overview for U.S. Steel (NYSE:X)
WHAT HAS CHANGED?
Two major trends impacting the global and U.S. domestic steel industry have intensified over the course of the last year, which have impacted U.S. Steel's business prospects.
- Sharp increase in steel imports into the U.S.
- Steel imports into the U.S. have been rising sharply over the course of the last year or so. The penetration of finished steel imports as a percentage of the U.S. domestic steel market increased to 29.3% in 2015, up from 28.1% and 23.2% in 2014 and 2013, respectively. A sharp increase in Chinese steel exports and a strong U.S. Dollar have contributed to the increase in steel imports. A significant proportion of U.S. steel imports are from developing countries which have low labor costs and low overall costs of production. Domestic steelmakers contend that these imported steels are priced unfairly low and have filed antidumping petitions with U.S. trade authorities. U.S. trade authorities have imposed preliminary antidumping duties on these imported steels, with the final determination of duties expected later in 2016. Competition from these low-priced imports has negatively impacted shipments and realized prices for the domestic steel industry. However, the imposition of antidumping duties on steel imports should help boost the prospects of the domestic steel industry, including U.S. Steel.
- Weakness in domestic Chinese demand for steel and impact on foreign markets
- The Chinese steel industry is currently facing weak domestic demand, primarily due to a slowing Chinese economy. However, production levels have not been adjusted corresponding to the weakening demand conditions. As a result, the Chinese domestic steel market is currently characterized by an oversupply situation, which helped provide a sharp boost to Chinese steel exports, which rose 20% year-over-year in 2015. The steep increase in Chinese steel exports has negatively impacted the business prospects of steelmakers globally. However, increasing capacity curtailments in China (in response to the weakness in domestic demand) as well as the imposition of antidumping duties on Chinese imports in parts of the world, such as the U.S., is likely to retard the growth in Chinese steel exports.
Below are key drivers of U.S. Steel's value that present opportunities for upside or downside to the current Trefis price estimate for U.S. Steel:
U.S. Tubular Products division
- U.S. Tubular Products EBITDA Margin: The EBITDA Margin for the U.S. Tubular Products division fell to -12% in 2015 from 15% in 2014 due to a sharp decline in the division's shipments as a result of a decline in demand for tubular steels with a decline in oil prices. We expect realized prices and margins for the division to start recovering from 2017 onward with a recovery in oil prices. U.S. Steel's own cost reduction and productivity enhancement initiatives will boost the division's margins, too. If the recovery in margins is sharper than expected, and margins rise to 18% by the end of our forecast period as opposed to 13% in the base case, it would represent an upside of around 4% to the Trefis price estimate.
- U.S. Flat Rolled Products Average Price: We currently expect the average realized price for the U.S. Flat-rolled division to rise to $935 per ton by the end of the forecast period post the imposition of anidumping duties on Chinese imports in 2016. However, if the recovery in realized prices is less than anticipated and the division's average realized price recovers to $890 per ton by the end of the forecast period, it would represent a downside of around 3% to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for U.S. Steel at the top of the page.
U.S. Steel is an integrated steel producer of flat-rolled and tubular products with major production operations in North America and Europe. An integrated producer uses iron ore and coke as primary raw materials for steel production. According to the latest World Steel Association's statistics, U.S.Steel is the thirteenth largest steel producer in the world.
U.S. Steel's U.S. Flat-rolled and European operations have an annual raw steel production capability of 22 million tons, of which 17 million tons is located in North America and 5 million tons in Europe. In addition, the U.S. Tubular Products division had a production capacity of 2.8 million tons in 2015.
U.S. Steel is also engaged in other business activities, most of which are related to steel making operations, including transportation services (railroad and barge operations) and real estate operations.
Flat Rolled products refer to the steel sheets and plates that are made by rolling processes. The various categories of the Flat Rolled products include: hot rolled sheets, cold rolled sheets, coated sheets, semi finished bars and plates, and tin mill products.
The U.S. Flat Rolled division is the most valuable division for the firm for the following reasons:
Largest revenue generating division
The U.S. Flat Rolled division generated 72% of U.S. Steel's total revenues in 2015, which stood at $11.6 billion. The EBITDA margin for the segment stood at around 4.9% in 2015. Both the revenue and margin for the division will rise as improved economic and business conditions (resulting from the imposition of antidumping duties on foreign steel imports) result in higher demand for steel and the division's products.
Highest production capacity and sales volumes
The Flat-Rolled segment has an annual production capacity of 17 million tons. The division's steel shipments stood at 10.6 million tons in 2015, as compared to 4.4 million tons for the European Steel segment.
Overcapacity in the steel industry
Overcapacity in the steel industry has hit margins for many operators, as steel mills globally are running at around 70% of their actual capacity on average. While this saves some costs, there are significant fixed costs that cause margins to compress when capacity is not optimal. As demand bounces back and capacity is optimized, we expect a recovery in margins for the likes of U.S. Steel.
Increasing demand from emerging markets
As developing nations, like China and India, witness robust economic growth, the demand for steel in Asia is expected to grow at a healthy pace. This should help the steel industry solve its overcapacity issue to some extent, and allow manufacturers to eventually increase steel prices.
Economic recovery to drive demand
We expect that an economic recovery in the U.S. and Europe will drive industrial demand, which should, in turn, provide a boost to prices as well as shipments.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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