U.S. Steel (NYSE:X) will announce its first quarter earnings on Monday, and we expect that it will post improved numbers on the back of an improving U.S. economy. European shipments may continue to decline due to the ongoing slowdown in demand, but after Alcoa (NYSE:AA) kicked off earnings season with a surprisingly profitable quarter, we believe that the market dynamics in the U.S. are improving.
We are in the process of revising our price estimate for U.S. Steel to reflect earnings as well as the improving near-term outlook.
Cautious recovery on a sequential basis
While the fourth quarter of 2011 marked wider than expected losses for U.S. Steel with low realized steel prices and a slump in demand, Q1 results should easily show sequential improvement. The U.S. economy has shown some encouraging progress and the company’s North American shipments are likely to show an increase with higher capacity utilization in its mills. Rising automotive sales figures should translate into better shipments even as aluminum continues to replace steel in autos due to its lighter weight. The company should also benefit from a boost in demand as energy companies continue to expand their natural gas and petroleum pipeline networks to meet rising demand and reduce the operational and transportation costs of fuel.
On the other hand, European shipments will continue to decline as the Eurozone is still reeling with overcapacity in the industry. Nevertheless the company’s margins could improve due to recent cost-cutting measures coupled with anti-dumping duties imposed by the U.S. government, which have effectively reduced the flood of imports that had put pressure on prices. Further, the company is looking at all time low natural gas prices to help boost margins.