U.S. Steel Faces The Threat Of Rising Imports In 2013

U.S. Steel (NYSE:X), along with other American steel producers, faces a threat from a surge in imports this year. Imports have been rising for the last three years in succession and 2013 is expected to be no different. Rising imports have implications on demand for domestically produced steel and oversupply keeps prices down even in the face of rising demand. ^[1]

According to the American Institute for International Steel, imports increased by 16.9% from 28.5 million tons in 2011 to 33.3 million tons in 2012. However, the apparent use of steel rose by just 7.8% in the same period, according to the American Iron and Steel Institute. This implies that the rise in supply is outstripping the rise in demand and the benefits of increased demand are not accruing to domestic steelmakers like U.S. Steel. ^[2]

The countries exporting steel to the U.S., particularly China, had surplus production last year due to weak economic conditions in their own markets. China’s steel exports to the U.S. rose by 34% last year. In 2013, it is expected that overall imports will surge by 2-3%, in line with steel use growth forecasts.

The rising level of imports is impacting steel prices in the U.S. market as evident from the year-on-year lower average realized prices of steel for U.S. Steel in 2012. An import surge will put further downward pressure on prices while depriving U.S. Steel of the opportunity of capturing the rise in demand for steel as the economy recovers.

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The Overall Steel Import Scenario In The U.S.

According to U.S. Steel’s 2012 earnings report, steel sheet imports to the United States accounted for an estimated 14% of the U.S. steel sheet market in 2012, up from 13% in 2011 and 2010. The imports of tubular steel, used mainly in the oil and gas industry, accounted for an estimated 52% of the U.S. domestic steel market in 2012, up from 47% in 2011 and 46% in 2010. We think that this is the reason why despite a tremendous shale gas boom, U.S. Steel’s shipments of tubular steel rose by just 4% year-over-year in 2012. The same holds true of prices, which rose by 4% in 2012 after registering 8% growth in 2011. The imports of tubular steel hurt U.S. Steel more because it sells at twice the price of flat rolled steel and generates much higher margins, and this takes away from potential U.S. Steel tubular sales. ^[3]

Foreign competitors may have lower labor costs and some are owned, controlled or subsidized by their governments, which allows their production and pricing decisions to be influenced by political and economic policy considerations as well as prevailing market conditions. In countries like China, state owned steel producers are heavily subsidized, which enables them to export to the U.S. at competitive prices and undercut the local producers. U.S. Steel’s average realized price for flat-rolled steel in 2012 stood at $750 per ton, down from $759 per ton in 2011. We think that imports had a big role to play in this even after accounting for general economic weakness. Increases in the future levels of imported steel could reduce future market prices and demand levels for steel produced in U.S. Steel’s North American facilities.

Is U.S. Steel Planning Countermeasures?

U.S. Steel contends that many of the steel imports violate U.S. trade laws. Under these laws, duties can be imposed against dumped products, which are products sold at prices below that of producer’s sales price in its home market or at prices lower than its cost of production. Countervailing duties (CVD) can be imposed against products that have benefited from financial assistance by a foreign government in production or export of the product.

For many years, U. S. Steel and other producers have sought the imposition of such duties and in many cases have been successful. Such duties are generally subject to review every five years and U.S. Steel actively participates in such review proceedings. In the past, the company has been successful in getting duties imposed on exporters from Germany, China and Vietnam. The levy of duties against Chinese producers was made possible due to a legislation enacted in the first quarter of 2012. Even now, U.S. Steel is engaged in litigation against Oman, United Arab Emirates, Vietnam and India.

However, U.S. Steel doesn’t succeed every time and there could also be political factors that lower the level of protection against international trade law violations. Given the highly complex relationship between China and the U.S., any decision on levying duties needs to be weighed against potential repercussions in other areas. There is also a risk that international bodies such as the World Trade Organization or judicial bodies in the United States may change their interpretations of trade laws in ways unfavorable to U. S. Steel.

In the foreseeable future, we expect steel imports to increasingly impact the U.S. domestic players such as U.S. Steel that often compete with state-backed producers in other countries. This could lead to market share losses, profit margin pressure and weaker operating results in the future despite a recovery in steel demand.

One way to face competition is to focus on differentiation by moving up the value chain through innovation. For instance, 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. We don’t think that producers from other countries exporting to the U.S. are equipped to compete in this arena. ((Goldman Sachs Mining Conference Presentation, U.S. Steel Website))

We have a price estimate of $23 for U.S. Steel.

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1. INTERVIEW-US steel body sees ‘concerning’ imports surge in 2013, Reuters [↩]
2. US Steel Imports Rose 16.9 Percent in 2012, Journal of Commerce [↩]
3. U.S. Steel 2012 10-K, SEC [↩]