U.S. Steel Shows Encouraging Signs Of A Recovery

by Trefis Team
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U.S. Steel (NYSE:X) announced its fourth quarter results for 2012 Tuesday. While the company reported a net loss for the quarter and the whole year, the operating results across all major business segments were positive for a third quarter in succession. Going by the guidance provided by the company as well as market conditions, we expect the first quarter of 2013 to be moderately positive.

U.S. Steel reported a quarterly loss of $50 million as compared to the previous year’s loss of $211 million for the same quarter. Its overall loss for 2012 stood at $124 million, which is greater than the loss of $53 million incurred in 2011. Steel shipments and sales declined from last year, primarily due to the sale of U.S. Steel’s Serbia operations in the European business segment.

For the full year, the average realized price for steel fell drastically from $845/tonne to $742/tonne for the company’s European business due to challenging market conditions. Prices showed a negligible decline for the flat-rolled Steel segment from $759/tonne to $750/tonne and an appreciable rise for the tubular steel segment from $1612/tonne to $1687/tonne. While higher prices in the tubular steel segment were driven by increased drilling activity in the U.S., the Flat-rolled steel division was affected by cautious buying patterns among consumers in light of an uncertain economic outlook and the U.S. fiscal situation.

In the next quarter, the erformance of the flat-rolled segment is expected to be flat. While shipments in the tubular steel segment are expected to increase only slightly due to existing inventory levels, the European business is expected to perform well. Higher iron ore costs due to rising prices will impact the cost structure of the European business. [1]

U.S. Steel has three main business segments- Flat-rolled Steel, U.S. Steel Europe, and Tubular Steel. Flat-rolled steel accounts for nearly 75% of shipments while U.S. Steel Europe and Tubular steel account for 15% and 10% of the shipments respectively. The company’s total shipments of steel in 2012 stood at 21.7 million tonnes. [2]

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Going Forward

U.S. Steel has managed to achieve self-sufficiency in terms of its requirement for coke. Firstly, the company is now producing enough coke from its own facilities at Clairton and Gary Works. Secondly, it has taken advantage of cheap and plentiful natural gas available due to the shale gas abundance by coming up with methods to cost-optimize the blend of coke and natural gas used in its operations. For Q1 2013, the EIA has forecast a nearly 6.5% higher Henry Hub natural gas price as compared to the previous quarter and steel scrap prices are expected to be higher as well. Therefore, the cost advantage from expected lower coal prices will be offset to some extent, even though overall raw material costs are likely to be lower than the previous quarter for the Flat-rolled steel segment. [3]

The Flat-rolled steel segment may stand to gain from the automotive sector as U.S. Steel expects vehicle production to show an 18% annual growth in 2013. According to a company presentation given in November, U.S. Steel has formed a joint venture with Kobe Steel to produce light, ultra-high strength steel to be used in automobile manufacturing. This grade of steel is designed to meet the fuel efficiency requirements for automobiles in the years ahead. Production is expected to begin in Q1 2013 and we expect robust demand in future quarters. [4]

Demand from the construction industry and the pipe and tube industry is also expected to be strong in the U.S. While the company has raised steel prices for the next quarter, the impact on sales and profits will be subdued due to lower prices in the market-based contracts segment. Prices for market-based contracts lag spot prices and since the former account for 70% of the flat-rolled steel shipments, overall price realization is expected to be comparable to the fourth quarter of 2012.

Moderate demand growth is expected from the appliance, electrical steel and tin plate industries in Europe. For the tubular steel business, an expected increase in rig count is good news, but the increasing quantum of imports continue to pose a challenge to U.S. Steel. In 2012, imports constituted more than 50% of the total market share in the oil country tubular goods and line pipe market segments. For the same reason, positive impact from increased drilling in the Gulf of Mexico may be moderate.

The U.S. Steel management acknowledged receiving expressions of interests from potential buyers for its Slovakian plant, but declined to provide any further details. This facility produces 5 million tonnes of steel. If the sale of the Slovakian business goes through, it will end U.S. Steel’s presence in Europe. It has already sold its loss-making Serbian operations in January 2012. We think that a major factor driving a potential U.S. Steel decision to sell the Slovakian business could be the financial liabilities it may incur on account of new environmental regulations which are to be enforced shortly.

We have a price estimate of $23 for U.S. Steel which will be revised shortly in light of the recent earnings results.

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Notes:
  1. U.S. Steel Q4 2012 Earnings Conference Call, Seeking Alpha []
  2. U.S. Steel 8-K Filing, SEC []
  3. U.S. Steel Q4 2012 Earnings Conference Call Presentation, U.S. Steel Website []
  4. Goldman Sachs Mining Conference Presentation, U.S. Steel Website []
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