Higher Realized Prices and Cost Reductions Boost U.S. Steel’s Q2 Results

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United States Steel

U.S. Steel (NYSE:X) released its second quarter results on July 29 and conducted a conference call with analysts on July 30. Higher realized prices for the company’s Flat-rolled Steel division and cost savings helped nullify the impact of weather-related disruptions on the company’s operations. Shipment volumes fell year-over-year largely because of weather-related disruptions in North America. The company reported flat year-over-year quarterly revenues of $4.4 billion. However, income from operations improved to $35 million in the second quarter this year, as compared to a loss 0f $7 million in the corresponding period a year ago.

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Operational Performance

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Steel shipments for the Flat-rolled Steel segment fell to 3.527 million tons in Q2 2014 from 3.728 million tons in the corresponding period last year. This was expected, given the disruptions from extreme winter weather, which impacted production and shipments and also resulted in higher operating costs for the segment in Q2. However, the impact of lower volumes and the rise in costs was offset by a 7% year-over-year increase in realized prices for the segment from $725 per ton in Q2 2013 to $774 per ton in Q2 2014. As a result, the segment reported income from operations of $30 million in the second quarter as compared to a loss of $51 million in the corresponding period a year ago. [1]

The U.S. Steel Europe (USSE) segment’s shipments were flat year-over-year at 1.053 million tons versus 1.062 million tons in the corresponding period last year. Realized prices for the segment declined marginally to $691 per ton in the second quarter from $702 per ton in corresponding period last year. Despite flat shipments and realized prices, the segment’s income from operations improved to $38 million in Q2 2014 as compared to $10 million in Q2 2013. This was primarily because of lower raw material and operating costs as well as weakening of the U.S. Dollar against the Euro in Q2 2014. ((U.S. Steel’s Q2 2014 10-Q, SEC))

The Tubular Steel segment’s average realized price fell to 1,479 per ton in Q2 2014 from 1,510 per ton in Q2 2013. This was primarily as a result of competition from cheap imported tubular imports, which has driven down prices. Steel shipments stood at 449,000 tons, marginally lower  than the 456,000 tons reported in Q2 2013. However, lower operating costs offset the negative impact of lower realized prices. The segment reported $47 million as income from operations, virtually flat as compared to the corresponding figure of $45 million for Q2 2013. ((U.S. Steel’s Q2 2014 10-Q, SEC))

The Carnegie Way

The company management provided updates on The Carnegie Way, an ongoing initiative that is aimed at creating value by enhancing efficiency, reducing costs and boosting profitability. The company provided some details about the break-up of areas where Carnegie Way benefits have been realized. Improvements in manufacturing processes, supply chain and logistics as well as reductions in selling general and administrative expenses are the main areas where the benefits of initiatives undertaken under The Carnegie Way have been realized. [2]

Projects undertaken under this  initiative in the second quarter will translate into an improvement in margins to the tune of $145 million in 2014. In addition to the previously announced benefits of $290 million during the first quarter earnings, the total margin improvement as a result of The Carnegie Way will total $435 million for 2014. [3]

Outlook

The company’s income from operations is expected to rise in the third quarter, as the weather-related disruptions that negatively impacted the company’s results in Q2 will be absent. A return to normal operations will result in a benefit of $150 million to margins, which was the impact of increased operating costs as a result of weather-related disruptions in Q2. This is especially significant for the Flat-rolled Steel segment, for which production levels will rebound from the previous quarter’s levels. The company is also looking to rebuild its inventory levels in the rest of the year, which should imply a robust rise in third quarter volumes. ((U.S. Steel’s Q2 2014 10-Q, SEC))

The USSE segment’s results will be negatively impacted by planned maintenance activity. This will result in a fall in production volumes as well as an increase in repair and maintenance costs. The negative impact of the planned maintenance activity will be offset by lower raw material prices, particularly iron ore prices. ((U.S. Steel’s Q2 2014 10-Q, SEC))

The Tubular Steel segment is expected to report marginally higher realized prices as a result of strong demand due to robust oil and gas drilling activity. However, with the U.S. International Trade Commission’s (ITC) ruling on the Oil Country Tubular Goods (OCTG) trade case expected in mid-August, no significant benefits in terms of improved pricing are expected in the third quarter. The U.S. Department of Commerce (DOC) had recently ruled that additional duties will be levied on imports of OCTGs from eight countries, including South Korea, which accounts for a majority of tubular steel products imported into the U.S. Competition from cheap, imported tubular goods has driven down realized prices and margins for the Tubular Steel segment. The company had recently announced the idling of two facilities producing tubular steel, citing difficult business conditions created primarily by the imports of tubular goods. ((U. S. Steel To Idle Two Tubular Facilities In Pennsylvania And Texas; Foreign Dumping Of Unfairly Traded Tubular Products A Contributing Factor, U.S. Steel Press Release)) If the ITC upholds the DOC’s ruling, it will significantly boost the prospects of the Tubular Steel division.

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Notes:
  1. U.S. Steel’s Q2 2014 10-Q, SEC []
  2. U.S. Steel’s Q2 2014 Earnings Presentation, U.S. Steel Website []
  3. U.S. Steel Q2 2014 Earnings Conference Call Transcript, Seeking Alpha []