U.S. Steel (NYSE:X) will announce its third quarter earnings on Tuesday, October 30. We expect weaker revenues and profits compared to Q2 2012 in absence of any positive change in market conditions. The economic environment in Europe remains challenging and the nature of recovery in the U.S. is still fragile. The company has admitted that its Q3 results are expected to be weaker than those of Q2. It expects tubular steel profits to remain essentially unchanged in Q3 compared to Q2 as it thinks that lower costs will offset lower prices and volumes.
While the automobile and construction sectors are showing encouraging trends, a full-fledged recovery continues to remain elusive. An economic recovery is expected in the long term, so the long-term prospects are positive but near-term headwinds are not expected to subside soon. 
United States Steel Corporation is an integrated steel maker with a steel making capacity of over 31 million tons, with the majority of its operations in North America and Eastern Europe. Flat-rolled products, tubular products and U.S. Steel Europe (USSE) are the company’s three main reporting segments.
Prices to Weigh on Earnings
We expect average realized prices to decline across the segments as steel prices on the London Metal Exchange (LME) are trending lower compared to the previous quarter. The ongoing European debt crisis, slowing Chinese growth and mixed reports about the U.S. economy have contributed to the decline in steel prices on LME. ((Steel Billet Prices, LME))
The automobile shipment figures in the last few months have been encouraging. The company’s shipments to this sector account for a substantial portion of its flat-rolled steel shipments. The company should also benefit from the demand from energy companies as they continue to expand their natural gas and petroleum pipeline networks to meet rising demand and reduce operational and transportation costs.
On the other hand, European shipments will continue to decline as the Eurozone is still reeling with overcapacity in the industry. We expect the company’s margins to decline mainly on pricing concerns even as the recent cost-cutting measures could lend a little support. Further, the company is looking at all-time low natural gas prices to help boost its margins.
Bullish In The Long Term
An economic recovery in the long term should benefit steel companies, including U.S. Steel. A lot of the negative sentiment already seems to be factored into the current stock price. Until the economy recovers, we don’t see the demand for steel increasing substantially.
Also, short of an all-out war in the Middle East over the nuclear weapons issue in Iran, 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 have a price estimate of $19 for U.S. Steel, which is 17% ahead of the market price. We will revise our model once the earnings results are out.Notes: