U.S. Steel Earnings Review: Competition From Steel Imports Negatively Impacts Q1 Results

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United States Steel

U.S. Steel (NYSE:X) released its first quarter results on April 28 and conducted a conference call with analysts the next day. The company’s results suffered from an increase in steel imports and subdued demand conditions, which negatively impacted realized prices and shipments of the company’s Flat-rolled steel division, which accounts for around 60% of the company’s revenues. In addition, the results of the Tubular Steel segment, which primarily serves customers in the oil and gas space, were negatively impacted by a fall in demand as a result of subdued drilling activity. Furthermore, the strengthening of the U.S. Dollar against the Euro negatively impacted realized prices and weighed on the results of the company’s European operations. As a result of the combination of these factors, U.S. Steel’s adjusted EBITDA, which excludes the impact of one-time items, fell to $110 million in Q1 2015, from $288 million in the corresponding period of 2014. [1] The negative impact of external factors was partially offset by U.S. Steel’s ‘Carnegie Way’ initiative, an ongoing company-wide endeavor to reduce operating costs and increase the efficiency of its operations.

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Steel shipments for the Flat-rolled Steel segment stood at 2.62 million tons in Q1 2015, as compared to 3.12 million tons (excluding shipments from U.S. Steel Canada, the results of which were deconsolidated from the company’s financial results in Q3 2014) in the corresponding period of 2014. [1] This was primarily because of a surge in the levels of cheap steel imports to the U.S., competition from which has negatively impacted the company’s steel shipments in Q1. Steel imports to the U.S. have been bolstered by the strengthening of the U.S. Dollar against global currencies, which has made these imports cheaper in Dollar terms. As per the company, a significant proportion of these steel imports are priced unfairly low. [1] Steel sheet imports to the U.S. accounted for 22% of the domestic market in 2014, up sharply from 15% of the domestic market in 2013. [2] In addition, the competition from cheap imports has driven down average realized prices for the division, which fell 1% year-over-year to $768 per ton (excluding the results of U.S. Steel Canada). [1] Over and above the competition from steel imports the demand conditions for steel in North America may not be as robust as initially anticipated, with the World Steel Association revising downwards expectations of steel demand growth in the North American Free Trade Agreement (NAFTA) region to -0.9% in 2015, from previous estimates of 3.4% growth. [3] This is partly due to the high base effect, with demand increasing 12% in 2014, which was higher than expected. [4] As a result of the deterioration in pricing and shipments, the division’s income from operations fell to a loss of $67 million in Q1 2015, as compared to a profit of $85 million a year ago. [2]

The U.S. Steel Europe (USSE) segment’s shipments rose to 1.26 million tons in Q1 2015, from 1.03 million tons in the corresponding period of 2014. [2] This was primarily due to better market conditions in Europe, with firming economic growth. As per World Steel Association estimates, steel demand is expected to grow at 2.1% in 2015 in the Eurozone. [4] However, realized prices for the segment declined roughly 25% to $530 per ton in Q1 2015, primarily as a result of the strengthening of the U.S. Dollar against the Euro. [1] However, there was some deterioration in Euro-based prices as well. Despite a fall in realized prices, the segment’s income from operations improved to $37 million in Q1 2015, as compared to $32 million in Q1 2014. [1] This was primarily because of lower raw materials costs. The prices of iron ore, which is the chief input in steel-making, fell roughly 45% in Q1 2015, as compared to the corresponding period in 2014, due to a global oversupply situation. [5]

Impact of Low Oil Prices on Tubular Products Segment

The recent decline in oil prices has negatively impacted the Tubular Products segment’s prospects. The company’s Tubular Products division produces and sells seamless and electric resistance welded (ERW) steel casing and tubing (commonly known as oil country tubular goods or OCTGs), standard and line pipe, and mechanical tubing. These goods are primarily sold to customers in the oil, gas, and petrochemical markets. West Texas Intermediate (WTI) crude oil spot prices stood at levels of around $56 per barrel, around 45% lower year-over-year. [6]

As a result of the decline in oil prices, there has been a 49% reduction in U.S. rig counts since the beginning of the year. [7] As a result, the division’s shipments declined 47% year-over-year to 220,000 tons. [2] The results of the Tubular Products segment received a boost from the imposition of anti-dumping duties on the bulk of imported tubular steel products in Q3 2014. [8] Competition from imported tubular steels had negatively impacted the division’s realized prices and margins in the first nine months of 2014. The division’s average realized price rose 11% year-over-year to $1,637 per ton in Q1 2015, as a result of reduced competition from imported tubular steels. [2] As a result of the combination of these factors, the segment’s income from operations fell to $1 million, down from $24 million in the corresponding period a year ago. [2]

The Carnegie Way

With a subdued demand and pricing environment for steel prevailing in 2013, the company had launched an initiative known as ‘The Carnegie Way,’ which is focused on cost reductions and improvements in operational efficiency. The company provided some details about the break-up of areas where The 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. [7]

Projects undertaken under this translated into an improvement in margins to the tune of $575 million in 2014. [9] In addition, the company estimates that additional benefits of around $340 million will be realized through The Carnegie Way initiative in 2015. [10] Though the company has not specifically mentioned the benefits realized in Q1, given the subdued market conditions for steel, this ongoing initiative will boost the company’s results going forward.

 

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Notes:
  1. U.S. Steel’s Q1 2015 Earnings Release, SEC [] [] [] [] [] []
  2. U.S. Steel’s Q1 2015 10-Q, SEC [] [] [] [] [] []
  3. Short Range Outlook 2014-2015, World Steel Association []
  4. Short Range Outlook 2015-2016, World Steel Association [] []
  5. Iron Ore Spot Price Chart, Y Charts []
  6. WTI Crude Oil Spot Prices, Y Charts []
  7. U.S. Steel’s Q1 2015 Earnings Presentation, U.S. Steel Website [] []
  8.  U.S. steel pipe makers win key anti-dumping case against cheap imports, Reuters []
  9. U.S. Steel’s Q4 2014 Earnings Presentation, SEC []
  10. U.S. Steel’s Q1 2015 Earnings Call Transcript, SEC []