A Look At U.S. Steel’s Tubular Products Segment

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United States Steel

U.S. Steel (NYSE:X) is an integrated producer of flat and tubular steel products with its operations largely concentrated in North America and Europe. The company has three major operating segments: Flat-Rolled Products, U.S. Steel Europe and Tubular Products. The Tubular Products segment accounts for only around 16% of U.S. Steel’s revenues, but is a high-margin segment for the company. However, these margins have been under pressure. In this article, we take a closer look at this division of the company.

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Tubular Products

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The Tubular Products division produces and sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTG), standard and line pipe, and mechanical tubing. These goods are primarily sold to customers in the oil, gas and petrochemical markets, the production facilities for which are located mainly in the U.S. The company also has equity interests in producers of tubular goods located in the U.S. and Brazil. The segment’s annual production capacity is 2.8 million tonnes.

High Margins

The Tubular Products segment is very important for U.S. Steel as it has the highest margins amongst all of the company’s business segments. Gross margins for Tubular Products stood at 15% and 11% in 2012 and 2013, respectively. In comparison, gross margins stood at 8% and 7% in 2012 and 2013, respectively, for both Flat-rolled Products and U.S. Steel Europe. Tubular Products command much higher average realized prices per ton relative to U.S. Steel’s other segments. Demand for these products is strong due to robust oil and gas drilling activity in North America. [1] However, the margins of the Tubular Products segment have been under pressure lately despite robust demand. This is primarily due to competition from cheap OCTG imports.

OCTG Imports

Foreign competitors may have lower labor costs, and some are owned, controlled or subsidized by their governments. This may result in their production and pricing decisions being influenced by political and economic policy considerations, in addition to prevailing market conditions. In countries such as China, state-owned steel producers are heavily subsidized, which enables them to export to the U.S. at competitive prices and undercut local producers.

Energy related tubular products imported into the U.S. accounted for approximately 49% of the U.S. domestic market in 2013. 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 the 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. [2]

The U.S. Department of Commerce (DOC) determined in February 2014 that additional duties will be imposed on tubular imports from the Philippines, Saudi Arabia, Turkey, Taiwan, Thailand, Ukraine and Vietnam. The final determination and imposition of duty is only likely to happen in August. [3]

However, the DOC did not find dumping issues with imported tubular goods from South Korea. U.S. imports of South Korean OCTGs stood at 894,000 tons in 2013, which was more than the imports from the other eight countries combined. This is a matter of grave concern for U.S. Steel, as competition from cheap imports is leading to a fall in realized prices and margins for its tubular goods. [4]

Falling Realized Prices And The Road Ahead

Competition from imported tubular goods has led to a fall in realized prices for the company’s Tubular Products segment, from $1,687 per ton in 2012 to $1,530 in 2013. Average realized prices fell further to $1,479 per ton in Q1 2014. [5]

With imports from South Korea escaping the imposition of additional duties, competition from cheap, imported tubular goods is set to continue. This will put pressure on the company’s average realized prices and margins. Accordingly, the segment will have to focus on improving productivity and reducing costs in order to boost its prospects. U.S. Steel has already embarked upon a company-wide initiative, known as ‘The Carnegie Way’, to increase efficiency and reduce costs. Steps taken under this initiative may help boost the Tubular segment’s prospects, but the competition from imported goods looks set to continue. [6]

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Notes:
  1. U.S. Steel’s 2013 10-K, SEC []
  2. U.S. To Probe Steel Pipes From Turkey, 8 Others, Daily News []
  3. U.S. Steel, AK Steel Shares Slump Following Trade Finding, The Wall Street Journal []
  4. U.S. Oil Pipe Tariff Ruling Hits Western Steel Manufacturers, Reuters []
  5. U.S. Steel’s Q1 2014 10-Q, SEC []
  6. U.S. Steel’s Q1 2014 Earnings Conference Call Transcript, Seeking Alpha []