Higher Steel Prices And Cost Reductions Boost U.S. Steel’s Q3 Results

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U.S. Steel (NYSE:X) released its third quarter results on October 28 and conducted a conference call with analysts on October 29. The company’s year-over-year quarterly revenues rose 11% to $4.59 billion. [1] The company’s income from operations in Q3, excluding the impact of one-time items, rose sharply to $479 million, as compared to $113 million in the corresponding period last year. [2] As expected, the improvement in U.S. Steel’s results in the third quarter was driven by higher realized prices and volumes for its Flat-rolled Products division and the company’s efforts to reduce operating costs across all its business segments.

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Operational Performance

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Steel shipments for the Flat-rolled Steel segment rose to 3.69 million tons in Q3 2014 from 3.43 million tons in the corresponding period last year. The average realized price rose 3.3% year-over-year to $777 per ton in the third quarter, from $752 per ton in the corresponding period last year. [1] This was expected, given the improved demand and pricing  environement for steel in North America, as compared to the corresponding period a year ago. The Manufacturing Purchasing Managers Index (PMI) measures business conditions in the manufacturing sector of the concerned economy. When the PMI is above 50, it indicates growth in business activity, whereas a value below 50 indicates a contraction. This metric has consistently registered values of over 50 for all months in 2014 for the U.S. [3] This indicates strong manufacturing activity in the U.S., which is reflected in U.S. Steel’s third quarter results. Steel demand in the North American Free Trade Agreement (NAFTA) region, which consists of the U.S., Canada and Mexico, is expected to grow by 3.8% in 2014, as compared to a 2.4% fall in demand in 2013. [4] In addition to the strong price realizations and shipment volumes, lower raw materials cost, lower repairs and maintenance and other operating costs boosted the segment’s operating income to $347 million in Q3 2014, significantly higher than the figure of $82 million reported in the corresponding period last year. [1]

The U.S. Steel Europe (USSE) segment’s shipments rose to 987,000 tons in Q3 2014 from 861,000 tons in the corresponding period last year. However, realized prices for the segment declined roughly 6% to $671 per ton in Q3 2014, from $714 per ton in corresponding period last year. [1] The fall in prices is indicative of weak demand in Europe, due to economic weakness. This is exemplified by the Manufacturing PMI for the Eurozone, which has faltered somewhat lately. The Manufacturing PMI for the Eurozone, which stood at 54 for January 2014, has declined to 50.3 for September. [5] Sluggish manufacturing activity in the Eurozone was reflected in U.S. Steel’s third quarter results. Despite a fall in realized prices, the segment’s income from operations improved to $29 million in Q3 2014 as compared to a loss of $32 million in Q3 2013. This was primarily because of lower raw materials cost, lower repairs and maintenance and other operating costs. [1]

The Tubular Steel segment’s shipments fell to 428,000 tons in Q3 2014 from 459,000 tons in Q3 2013. This was primarily as a result of the idling of two facilities producing tubular steel by the company earlier on in the year. [6] The  segment’s average realized price rose 1.5% to 1,567 per ton in Q3 2014 from 1,543 per ton in Q3 2013. In addtion to higher realized prices, lower repairs and maintenance and other operating costs boosted the segment’s income from operations to $69 million in Q3 2014, from $49 million in Q3 2013. [1]

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 third quarter will translate into an improvement in margins to the tune of $85 million in 2014. In addition to the previously announced benefits under this initiative, the total margin improvement as a result of The Carnegie Way will total $495 million for 2014. [7]

Outlook

The Flat-rolled Products segment’s operating income is expected to fall in the fourth quarter as as result of planned maintenance activity, which is expected to raise repairs and maintenance costs by approximately $150 million. Shipment volumes are expected to decline by nearly 10% from Q3 levels, as shipment volumes for the segment will no longer include the results from U.S. Steel Canada. The results of the company’s Canadian unit from September 16 onwards will be reported separately, as it will undergo restructuring. [1]

The USSE segment’s will report better results sequentially in the fourth quarter after scheduled maintenace activity was completed in Q3. Shipments for this segment are expected to rise in Q4.

The results for the Tubular Steel segment will be boosted by the U.S. International Trade Commission’s (ITC) recent ruling in the Oil Country Tubular Goods (OCTG) trade case. The ITC ruled that anti-dumping duties will be levied against OCTG imports from South Korea, India, Taiwan, Turkey, Ukraine and Vietnam. OCTG imports from these countries account for the bulk of the imported energy-related tubular steel goods in the U.S., which were affecting the sales and realized prices of the Tubular Steel divsion. [8] The ITC ruling, along with an improved product mix as a result of a reduction in the company’s exposure to welded line pipe, will result in an improvement in realized prices for the segment in Q4. However, shipment volumes will decline as a result of the idling of the McKeesport and Bellville facilities earlier on in the year.

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Notes:
  1. U.S. Steel’s Q3 2014 10-Q, SEC [] [] [] [] [] [] []
  2. U.S. Steel’s Q3 2014 Earnings Presentation, U.S. Steel Website [] []
  3. U.S. Manufacturing PMI, Trading Economics []
  4. Short Range Outlook for Apparent Steel Use 2013-2015, World Steel Association []
  5. Euro Area manufacturing PMI, Trading Economics []
  6. 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 []
  7. U.S. Steel Q3 2014 Earnings Conference Call Transcript, Seeking Alpha []
  8. U.S. steel pipe makers win key anti-dumping case against cheap imports, Reuters []