U.S. Steel (NYSE:X) announced its second quarter results which showed a year-over-year decline in both revenues and net income. Revenues declined by 2% to $5.02 billion while net income declined by 55% to $101 million on a year-over-year basis. The company management believes that segment income from operations is a key measure for performance evaluation. Reportable segment & other businesses income from operations was reported at $330 million, higher than the previous quarter’s figure of $295 million but much lower than last year’s second quarter result of $396 million.
Solid Quarter for Flat Rolled and Tubular Divisions In Light Of Bleak Economy
The flat-rolled segment’s income from operations for Q2 was $177 million, which was comparable to the first quarter figure of $183 million, but much lower than $374 million from the second quarter of 2011. One needs to keep in mind that spot steel prices were considerably higher last fiscal year.
Tubular segment Q2 income from operations decreased compared to that of Q1 of this year. Shipment figures at 493,000 tonnes were approximately 7% lower than the record levels of the first quarter as distributors rebalanced their inventory to reflect lower forecasts for drilling activity and as U.S. Steel carried out a planned facility outage. ((United States Steel Corporation Reports 2012 Second Quarter Results, U.S. Steel News Release, July 31 2012)) Interestingly, U.S. Steel’s Europe segment returned to profitability due to higher average realized prices, reporting a segment income from operations figure of $34 million compared to a loss in the previous quarter. We believe that these results are impressive given the prolonged weak economic conditions in US and Europe.
Near Term Outlook Doesn’t Look Encouraging
By its own admission, U.S. Steel expects a weak Q3 owing to the challenging economic situation in Europe and the fragile nature of economic recovery in the U.S. It expects positive numbers across all segments, but lower than those in Q2.
For the flat-rolled segment, while average realized spot prices are projected to be lower for the third quarter, spot transaction prices are expected to increase as the quarter progresses. Still, overall average realized prices in Q3 are expected to be lower than this quarter. The automotive and construction industries, as usual, will continue to drive demand for flat-rolled steel.
Regarding the tubular segment, shipments are expected to be lower as oil and gas field services firms continue to adjust their drilling plans due to economic uncertainty and concern over energy prices. Shale gas drilling is still growing rapidly but a supply glut and the resultant fall in gas prices may cause operations to be suspended.
Regarding the company’s European business, average realized prices are expected to decrease compared to the second quarter as lower spot market prices carry over into the third quarter. Shipments are expected to be lower as service centers and distributors minimize inventory and Europe enters its summer holiday period. Overall results in the segment are expected to be weaker than the second quarter’s given the dismal economic sentiment and a weak Euro that discourages imports.
Our belief is that a recovery in Europe won’t happen anytime soon and it is likely to be a protracted and painful process. As events unfold we will factor them into our analysis and estimates. Although the latest jobs report for the US was positive, full recovery is still at a nascent stage. The geopolitical situation with respect to Iran seems to have reached a stalemate and the reduced Iranian oil supply in the global market has largely been compensated for by other producers.
Long Term Outlook
The long term driver for the company will again be the economy and its trajectory. Until the economy recovers, we don’t see demand for steel increasing substantially. Also, short of an all-out war in the Middle East, which may affect sentiments in the oil market, we don’t see oil prices increasing to a level that would prompt a dramatic increase in investments for oil drilling. Higher oil prices can make drilling economically viable in some of the more challenging oil fields such as those in the Gulf of Mexico. Given the high capital expenditure requirements and the complex scenario planning involved, these projects would occur over a longer time frame.
We are currently in the process of revising our estimates in light of recent earnings.