U.S. Steel Reports Net Loss On Lower Demand And Prices

-12.12%
Downside
40.96
Market
36.00
Trefis
X: United States Steel logo
X
United States Steel

U.S. Steel (NYSE:X) announced its second quarter results on Tuesday and reported a quarterly loss of $78 million compared to the previous year’s profit of $101 million for the same quarter. Steel shipments and sales declined from last year. Average realized prices were lower due to industry overcapacity. Shipments declined due to planned maintenance outages and worker lockout at the company’s Lake Erie Works facility as well as decreased drilling activity in oil and gas operations.

Demand from the automotive sector is expected to be stable going ahead. The company is focusing on producing value-added products for its customers in this segment, which will help them achieve fuel efficiency in order to meet regulatory requirements. Demand for its products in the tubular segment is expected to remain strong as well given the heavy drilling activity going on as natural gas prices rise in the U.S. However, growth in imports in this segment could spoil the party for U.S. Steel. The company, along with other major producers, has filed a trade case for imposition of duties on import of oil and tubular country goods from countries selling these at unfairly low prices.

Relevant Articles
  1. Can U.S. Steel Stock Return To Pre-Inflation Shock Highs?
  2. What’s Happening With U.S. Steel Stock?
  3. Will U.S. Steel Stock Continue To Outperform Despite Economic Headwinds?
  4. Is U.S. Steel Set For Tough Q3 Results?
  5. Why We Are Cutting Our Price Estimate For U.S. Steel Stock
  6. How Will U.S. Steel Stock Fare In An Uncertain Economy?

See Full Analysis of U.S. Steel Here

Operational Performance

U.S. Steel reported revenues of $4.1 billion this quarter compared to $4.6 billion in Q2 2012.

  • In the flat-rolled division, the company incurred a loss from operations of $51 million in the second quarter as compared to income of $177 million in Q2 2012. The deterioration in performance came as a result of a decrease in average realized prices, lower steel substrate sales to its Tubular segment, higher natural gas costs, lower income from its joint ventures, increased facility repairs and maintenance and other operating costs, and a decrease in shipment volumes.
  • In the European segment, income from operations was $10 million in the second quarter compared to $34 million last year. The decrease resulted mainly from lower average realized prices and an increase in other operating costs. The impact due to these factors was offset to some extent by lower raw material costs and increased shipment volumes.
  • In the tubular goods division, income from operations for the quarter stood at $45 million, compared to a profit of $103 million last year. The decrease came about primarily due to lower average realized prices and a decrease in shipment volumes. These decreased were offset partially by lower substrate costs.
  • Average realized price per tonne of steel declined across business segments. Average realized price per tonne declined from $772/tonne to $725/tonne in the flat-rolled division, $767/tonne to $702/tonne in the European segment and $1,706/tonne to $1,510/tonne in the tubular segment. Prices were influenced by decreased drilling activity as well as macroeconomic sentiment as growth in China slowed down. China consumes majority of the world’s steel and hence demand from here has a major impact on worldwide steel prices. ((U.S. Steel Q2 2013 10-Q, SEC))

Imports Are A Major Concern

The rising tide of imports into the U.S. has led U.S. Steel and other major producers to ask for duties on imported oil and tubular country goods (OCTG) which are supposedly being sold at unfairly low prices. This has prompted the U.S. Commerce Department to launch an investigation into alleged unfair trade practices being followed by exporting countries. Also, voting is scheduled to take place in a meeting of the International Trade Commission On August 16 to decide whether the case should proceed and further investigations be carried out.

Imports of OCTG steel from the nine countries under investigation (India, Vietnam, Philippines, Thailand, Taiwan, Turkey, Saudi Arabia and Ukraine) totaled $1.8 billion in 2012. The quantity has more than doubled since 2010, owing to rising U.S. oil and natural gas production which is increasing demand for OCTG steel. Given the high price realizations from OCTG grades of steel and the fact that they account for 15% of its revenues, U.S. Steel has a significant stake in ensuring a favorable outcome from the investigation. [1]

Until the time the investigation concludes, U.S. Steel’s OCTG business is likely to continue facing challenging business conditions from imported products.

Outlook

In the third quarter, U.S. steel expects average realized prices in the flat-rolled division to improve due to higher spot prices and a favorable product mix. However, shipments in this segment are expected to decrease due to a blast furnace outage at its Great Lakes Works facility and the ongoing Lake Erie Works labor dispute. In the European segment, average realized prices are expected to be lower due to a decrease in spot and contract prices. Also, a scheduled blast furnace outage will result in significantly lower shipment figures. In the tubular division, shipments are expected to increase due to higher drilling activity and average realized prices are projected to be comfortable. ((U.S. Steel Q2 2013 Earnings Conference Call, Seeking Alpha))

Some New Initiatives Announced

Even as U.S. Steel fights a trade case against imported tubular goods, it continues to invest in developing additional capabilities and capacity at its Lorain Tubular operations to meet the demand of its tubular steel customers. It expects to realize the full benefits of its investments if the trade case gets resolved in its favor.

The company has also launched a profitability and value enhancement initiative. The objective is to evaluate the business and come up with sustainable measures to reduce costs and enhance revenues. The specific areas of focus are rationalization of raw material usage that accounts for about two-thirds of the company’s product cost structure, and reduction of conversion costs and fixed costs across all facilities.

U.S. Steel has also set up a detailed and structured process to reevaluate market strategies. It has set up teams of experts who will be responsible for developing and executing ideas within their areas of expertise. There are other teams which will come up with ideas for improvisation of operations at specific project sites and implement them. These initiatives are meant to drive long term change and build organizational capabilities, so no quantitative targets have been set for now. The company believes that a number of small changes and fine tuning across the board will go a long way in reducing costs and increasing revenue generation.

We have a price estimate of $17 for U.S. Steel, which will be revised shortly now that the earnings results are out.

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

Notes:
  1. US to probe steel pipes from Turkey, 8 others, Daily News []