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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 risen sharply over the course of the last year. The market share of steel sheet imports in the U.S. domestic steel sheet market stood at 22% in 2014, up sharply from 15% in 2013, and is expected to rise further in 2015. A significant proportion of steel imports are from developing countries which have low labor costs and low overall costs of production. Two important reasons for the increase in steel sheet imports are the strengthening of the U.S. Dollar and the sharp increase in Chinese steel exports. Competition from these low-priced imports has negatively impacted shipments and realized prices for the domestic steel industry, as well as for the company's U.S. steelmaking operations.
- Weakness in Chinese demand for steel and rising steel exports
- The Chinese steel industry is currently facing weak domestic demand, primarily due to a slowing Chinese economy. Domestic demand for steel stood at 711 million tons in 2014. In comparison, Chinese steel production in 2014 stood at 823 million tons. This oversupply situation in the Chinese domestic steel market has provided a sharp boost to Chinese steel exports, which in turn have boosted steel imports into the U.S., adversely impacting the U.S. domestic steel industry.
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 U.S. Tubular Products division declined from 13.1% in 2012, to 11.1% and 9.9% in 2013 and 2014, respectively. This is primarily due to a fall in realized prices for the division as a result of competition from cheap imported tubular steel products. With the imposition of anti-dumping duties on the majority of imported tubular steel products in Q3 2014, the competition from these imported tubular products is expected to dissipate. We expect realized prices and margins for the division to rebound in 2014. If margins do not rebound as expected, it would represent a downside of around 5% to the Trefis price estimate.
- U.S. Tubular Products Shipments: We currently expect shipments for the Tubular Products division to grow at a modest rate of around 2% annually throughout the forecast period. This is primarily because of declining capital expenditure in the upstream oil and gas sector, which constitutes the main customer base for the division, as a result of weak crude oil prices. However, if crude oil prices recover earlier than expected, there may be a sharp increase in shipments from the division. This scenario represents an upside of around 5% 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 24.4 million tons, of which 19.4 million tons is located in North America and 5 million tons in Europe. In addition, U.S. Steel's Tubular division's annual production capability is 2.8 million tons.
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 67% of U.S. Steel's total revenues in 2014, which stood at $17.5 billion. The EBITDA margin for the segment stood at around 6.5% in 2014. Both the revenue and margin for the division will rise as improved economic conditions result in higher demand for steel.
Highest production capacity and sales volumes
The Flat-Rolled segment has an annual production capacity of 19.4 million tons. The division's steel shipments stood at 13.9 million tons in 2014, as compared to 4.2 million tons for the European Steel segment.
Overcapacity in the steel industry
The global steel industry has been facing the issue of over capacity. Global capacity utilization stands at around 75%, even as many manufacturers have closed down or cut capacity at their mills. As the global economic downturn took place, the steel industry was one of the worst hit, and demand has only partially recovered. However, as economic growth picks up, we expect demand to improve.
Increasing steel imports in North America and Europe
Steel imports into North America and the EU account for a significant portion of steel consumption in these geographies. For example, steel sheet imports to the U.S. accounted for an estimated 22% and 15% of the steel sheet market in the U.S. in 2014 and 2013, respectively. A significant proportion of these imports are from developing countries which have low labor costs and low overall costs of production. Competition from these low-priced imports may drive down steel prices as well as mitigate the growth in steel shipments for U.S. Steel in these markets.
Weakness in input costs to lower the production cost of steel
Iron ore, metallurgical coal, as well as oil and gas prices, have tumbled over the course of the last year, or so. Lower iron ore and coal prices, which are major raw materials in the production of steel, and lower energy costs, will lower the cost of production of steel. This will limit the upside from a potential increase in prices for steel products.
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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