U.S. Steel And Kobe Steel Commission New Line For Light, High-Strength Steel

U.S. Steel (NYSE:X) and Kobe Steel of Japan have formally commissioned the new Continuous Annealing Line at Liepsic, Ohio, as part of their joint venture, PRO-TEC Coating Company. The line has been constructed at a total cost of $400 million and will produce light, ultra-high strength steel for the automotive market.

This investment has been made to meet expected demand from automotive manufacturers for materials which will help them achieve legally mandated fuel economy standards by 2025. We think that it represents a good business opportunity for the company in a space where competition is still nascent and imports are minimal or non-existent. ^[1]

See Full Analysis of U.S. Steel Here

Need For The Continuous Annealing Line

Under the Corporate Average Fuel Economy (CAFE) standards, by 2025, automotive companies are required to manufacture passenger vehicles which will travel 54.5 miles per gallon of gas. This will need companies to use lighter materials to reduce fuel consumption while not compromising on passenger safety. Hence they require light-weight, high-strength materials. Traditional grades of steel used for car bodies are not adequate for the purpose. In the last 10 years, the use of high-strength steel has doubled and is still growing at a rapid rate. Steel is preferable to aluminum due to its strength and lower cost.

PRO-TEC Coating Company is a 50-50 joint venture partnership between U.S. Steel and Kobe Steel. With an annual production capacity of 1.5 million tonnes, PRO-TEC is one of the world’s largest facilities for producing high-end steel sheets to meet the needs of the automotive industry. The new 500,000 tonne Continuous Annealing Line at this facility will produce the next generation of Advanced High Strength Steels (AHSS) and Ultra High Strength Steels (UHSS) whose strength will exceed 590 mega-pascal. These categories of steel will have flatness and formability levels previously absent at such high strengths.

U.S. Steel’s flat-rolled steel business segment may stand to gain from the automotive sector this year as the company expects vehicle production to show 18% annual growth in 2013. New car sales in the United States have made a strong recovery in the recent years, reaching about 14.5 million units in 2012. Car sales are projected to exceed 15 million units in 2013. ^[2]

Minimal Threat From Imports

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.

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. ((U.S. Steel 2012 10-K, SEC))

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. 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. ((INTERVIEW-US steel body sees ‘concerning’ imports surge in 2013, Reuters))

It is difficult to see the governments in China and other countries investing in high-strength steel technology and providing subsidies for the same. This is because they haven’t mandated fuel economy standards that would create a market need in their own country to justify investing in developing grades of high-strength steel.

Thus, U.S. Steel may have an additional advantage in this segment since imports are likely to be minimal. The new line will produce steel using technology developed in-house which insulates it from domestic competition as well. Any potential exporters to the U.S. will take time to perfect similar products before they can start competing. Thus, U.S. Steel may enjoy a first mover advantage and entrench itself in the market.

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

Understand on Trefis how a company’s products impact its stock price

1. United States Steel Corporation And Kobe Steel, Ltd., Of Japan Commission PRO-TEC Coating Company Continuous Annealing Line, U.S. Steel News Release [↩]
2. BIZ BRIEF: Kobe Steel’s U.S. joint venture starts producing steel sheet for vehicles, The Asahi Shimbun [↩]