U.S. Steel Reports Higher Quarterly Loss Due To One-Time Charges

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United States Steel

U.S. Steel (NYSE:X) reported its fourth quarter results on January 28 and a quarterly loss of $122 million compared to the previous year’s loss of $50 million for the same quarter. While revenues fell on lower shipments, one-time restructuring charges also contributed to the overall loss. Without one-time charges, the company made a profit of $38 million compared to a loss of $39 million in Q4 2012. It took a $302 million non-cash charge due to previously announced permanent closure of iron and steel-making operations at its Hamilton, Ontario mill.

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 in the U.S. for shale gas. 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 the imposition of duties on the import of oil and tubular goods from countries selling them at unfairly low prices.

We have a price estimate of $19 for U.S. Steel, which represents 24% downside to the market price. We will update this shortly to reflect the fourth quarter earnings.

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Operational Performance

U.S. Steel reported revenues of $4.26 billion this quarter compared to $4.48 billion in Q4 2012.

  • In the flat-rolled division, the company incurred a profit from operations of $87 million in the fourth quarter as compared to an income of $11 million in Q4 2012. The increase in profits was due to higher average spot and market-based contract prices and lower repairs, maintenance and other operating costs. Shipments increased in this segment as production resumed at Lake Erie Works in October.
  • In the European segment, the profit from operations was $12 million in the fourth quarter compared to a profit of $7 million last year. The increase resulted mainly from higher shipments, and lower repair and maintenance costs. The impact due to these factors was offset to some extent by lower prices.
  • In the tubular goods division, income from operations for the quarter stood at $32 million which was the same as last year. The company was able to generate similar profits despite lower prices as it reduced operating costs, and increased semi-premium and premium connection volumes.
  • Average realized price per tonne increased from $721/tonne to $750/tonne in the flat-rolled division. However, it decreased from $718/tonne to $692/tonne in the European segment and $1,624/tonne to $1,509/tonne in the tubular segment. Flat-rolled prices increased marginally due to higher spot prices, while rising imports and overcapacity led to a reduction in tubular steel prices. [1]

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. In December, the Department of Commerce is likely to determine preliminary countervailing duties on the countries under investigation. Preliminary anti-dumping duties are expected to be imposed in February 2014.

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. [2]

Until the conclusion of investigation, U.S. Steel’s OCTG business is likely to continue facing challenging business conditions from imported products. The growing price differential between U.S. and Chinese steel is expected to result in a further surge in imports going forward. [3]

Outlook

In the first quarter of 2014, U.S. Steel expects better performance in the flat-rolled division due to higher average realized prices and shipments, as well as reduced repairs and maintenance costs. Average realized prices are expected to increase due to higher contract and spot market prices, and increase in demand following the holiday-heavy lean season in the fourth quarter. In the European segment, the company expects results to be comparable to the fourth quarter due to increased average realized prices as a consequence of a favorable product mix and gradual recovery of the spot market. In the tubular segment, performance is expected to be weaker than the fourth quarter. While shipments are expected to increase as drilling activity picks up and operating costs are expected to decrease, these benefits will likely be more than offset by a decrease in average realized prices and an increase in substrate costs. The reasons behind lower average prices are expected to be rising imports and increased domestic supply. ((U.S. Steel Q4 2013 Earnings Conference Call, Seeking Alpha))

Update On Project Carnegie

In the second quarter earnings conference call, U.S. Steel had announced the launch of a profitability and value enhancement initiative called Project Carnegie. 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 Q2 2013 Earnings Conference Call, Seeking Alpha))

U.S. Steel communicated that the initiative is progressing very well but once again declined to give out any hard numbers or declare any quantitative targets. It reiterated that it would prefer the effort to reflect in the company’s financial numbers going ahead, rather than spending time and energy on communication about the project itself. However, the company did say that it has completed projects that will provide sustainable cost savings worth $100 million annually, with $75 million targeted to be generated in 2014.

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Notes:
  1. U.S. Steel Q4 2013 8-K, SEC []
  2. US to probe steel pipes from Turkey, 8 others, Daily News []
  3. Steel Imports Into U.S. Surge, WSJ []