U.S. Steel Revenues Decline As Market Conditions Remain Difficult

U.S. Steel (NYSE:X) announced its third quarter results which showed a year-over-year rise in net income but a sequential decline. Net income in the third quarter stood at $44 million as compared to $101 million the previous quarter. Net sales this quarter stood at $4.7 billion, which is less than the previous year’s figure of approximately $5.1 billion over the comparable period. Steel shipment volumes were 5.3 million tonnes compared to 5.5 million tonnes in Q3 2011.

Economic conditions continued to remain challenging in all markets for the company. While European countries continue to struggle, sustainable recovery in the U.S. is still a long way off.

Flat-rolled steel shipments in the third quarter remained in line with second quarter figures, but prices were lower. According to U.S. Steel, higher imports earlier in the year in conjunction with lower domestic scrap and global raw materials prices, caused spot and index-based contract prices to decrease in the third quarter. This explains the year-over-decline in revenue figures. ^[1]

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.

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Performance of Different Business Segments

According to U.S. Steel, since the markets in North America have done comparatively better than other regions, they have attracted higher imports. The resulting competition contributed to lower prices in the third quarter.

As far as the company’s European business for flat-rolled and tubular steel is concerned, Europe’s economic problems have caused demand to decrease while oversupply remains a concern. Consequently, prices and shipments decreased in the third quarter. However, U.S. Steel claimed that a combination of lower raw materials costs and cost benefits derived from a good operating performance in the quarter substantially offset the effects of lower selling prices and shipments.

Income from operations of $102 million for the tubular steel business in North America was in line with the previous quarter’s figures. The effect of lower prices and shipments were offset by lower substrate costs. Tubular steel is typically used in rigs used for oil and gas drilling activities. The count for oil-directed rigs decreased in the third quarter after peaking in the first half of the year. The number of gas-directed rigs also continued to decrease throughout the quarter. We think that low natural gas prices were primarily responsible for a decline in drilling activities for gas. U.S. Steel also said that end users are managing their inventory levels in order to stay within their capital budgets for 2012. Imports were also responsible to an extent for oversupply and lower prices in this business segment.

Outlook For The Next Quarter

U.S. Steel expects a loss in the flat-rolled steel segment next quarter due to slightly lower average realized prices as well as lower shipments and higher operating costs. However, according to the company, market conditions have recently begun improving in North America, and it believes that new spot orders will be transacted for higher prices later in the fourth quarter. Operating costs are expected to increase due to scheduled blast furnace and other maintenance projects.

For the European segment, U.S. Steel expects its results to be around breakeven levels. Average realized prices are expected to decrease, reflecting lower spot market and quarterly contract pricing. Shipments are projected to decrease compared to the third quarter due to lower consumption in automotive and other end-user industries. Operating costs for this segment are expected to decrease compared to the third quarter, primarily due to lower raw material costs.

For its Tubular segment, U.S. Steel expects fourth quarter results to remain profitable but well below third quarter results. Average realized prices are expected to be lower, and shipments are projected to be significantly lower than the third quarter as imports are expected to continue at high levels despite end users decreasing drilling activity in order to operate within their 2012 capital budgets.

Outlook For 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.

We have a price estimate of $19 for U.S. Steel, which is 15% ahead of the market price. We will be revising our model shortly in light of the recent earnings results.

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1. United States Steel Management Discusses Q3 2012 Results – Earnings Call Transcript, Seeking Alpha [↩]