U.S. Steel Earnings Preview: Higher Steel Prices to Boost Results

U.S. Steel (NYSE:X) will announce its first quarter earnings on Tuesday, April 29. We expect the company to report higher profits year-over-year. This is primarily driven by a better pricing environment for steel this quarter as compared to the corresponding period a year ago. This is reflected in London Metal Exchange (LME) steel billet spot prices. These prices ranged between $200-300 per tonne in Q1 2013. However, they were above $350 per tonne for most of Q1 2014. Further, cost savings driven by the company’s ‘Project Carnegie’ initiative are expected to boost profits. ^[1]

Though the first quarter will present a better pricing environment to U.S. Steel, the average realized prices for its Tubular Products segment are expected to be lower. This is due to a high level of oil and tubular country goods (OCTG) imports which the company deems are being sold at unfairly low prices.

You can check out our full analysis for U.S. Steel here:

Challenges In Tubular Steel Segment

The Tubular Products segment of U.S. Steel is primarily involved in the production and sales of oil country tubular goods (OCTG). These goods serve customers in the oil, gas and petrochemicals markets. Energy related tubular products imported into the U.S. accounted for approximately 49% of the U.S. domestic market in 2013. The Tubular Products segment accounted for around 16% of U.S. Steel’s 2013 revenues.

U.S. Steel and other domestic steel producers contend that a significant number of these imports are priced unfairly low. These companies filed anti-dumping duty (AD) and countervailing duty (CVD) petitions against OCTG imports from India and Turkey along with AD petitions against OCTG imports from Philippines, Saudi Arabia, South Korea, Taiwan, Thailand, Ukraine and Vietnam. OCTG imports from these nine countries had a combined value of $1.8 billion in 2012 which was more than double their 2010 values. Rising U.S. oil and natural gas production has increased the demand for these OCTGs. The U.S. Department of Commerce (DOC) has made preliminary determinations of duties to be imposed on imports from these countries in February 2014. However, the final determination and imposition of duty is only likely to happen in August. ^[2]

The low-priced OCTG imports have driven down average realized prices for the Tubular Products segment. Despite the higher shipment volumes expected in the first quarter as drilling activity increases, lower realized prices are expected to affect the profitability of the Tubular Products segment.

Other Developments

Shipment volumes for the company’s U.S. Flat-rolled Products segment are expected to increase in 2014 as compared to last year. The driver of higher volumes is expected to be stronger performance by industries served by U.S. Steel. The North American industrial equipment, automotive and construction sectors, which are served by the company’s Flat-rolled Products segment, are expected to perform strongly this year.

The recovery in the Eurozone manufacturing sector, which accelerated towards the second half of 2013, is expected to continue at a modest pace in 2014. The Eurozone Manufacturing Purchasing Managers Index (PMI) measures business conditions in the Eurozone manufacturing sector. This metric registered an average value of 53.4 over the first quarter. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction in business activity. Growth has picked up particularly in Germany, Netherlands, Italy and Ireland. This will benefit U.S. Steel’s European operations. ^[3]

Project Carnegie, an initiative aimed at reducing costs and improving efficiency, was announced by U.S. Steel in 2013. Steps undertaken under this initiative have accounted for $75 million in savings in 2013. This figure is expected to rise to $150 million in savings in 2014. These measures are an integral part of U.S. Steel’s drive towards profitability. ^[4]

Global steel capacity has continued to increase. Steel capacity in China now stands at about 1 billion tonnes per annum. These trends are expected to result in an oversupply situation, with demand not having kept pace. These are expected to have negative implications for prices moving forward. ((U.S. Steel 2013 10-K, SEC))

What To Look Out For

We will be keenly looking out for updates regarding U.S. Steel’s crusade against steel imports. A satisfactory outcome will boost the company’s business prospects. Further, details regarding initiatives to be undertaken under Project Carnegie will be of interest to us. The management is also expected to give its outlook on shipments and price realizations for the next quarter. This will throw some light on the road ahead for U.S. Steel.

1. Steel Billet Spot Prices, LME [↩]
2. U.S. To Probe Steel Pipes From Turkey, 8 Others, Daily News [↩]
3. Markit Eurozone Manufacturing PMI, Markit Economics Press Relase [↩]
4. United States Steel’s CEO Discusses Q4 2013 Results – Earnings Call Transcript, Seeking Alpha [↩]