How U.S. Steel Could Be Impacted By The Potential Imposition Of Anti-dumping Duties On Steel Imports

A sharp increase in steel imports into the U.S. has negatively impacted the prospects of domestic steelmakers such as U.S. Steel (NYSE:X). 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. ^[1] This was reflected in the company’s Q1 results, in which shipments for the Flat-rolled Steel segment stood at 2.62 million tons, 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. ^[2] In addition, competition from cheap imports drove down average realized prices for the division in Q1, which fell 1% year-over-year to $768 per ton (excluding the results of U.S. Steel Canada). ^[2]

As per the domestic steel industry, a significant proportion of these imports are priced unfairly low. In response to the sharp rise in steel imports, domestic steelmakers have petitioned the U.S. International Trade Commission  seeking the imposition of anti-dumping duties on imported steel from China, India, Italy, South Korea, and Taiwan for alleged unfair pricing of these imports. ^[3] If anti-dumping duties are levied upon these steel imports, it would make imported steels less competitive and boost the prospects of domestic steelmakers such as U.S. Steel. In this article, we will explore the impact of this scenario on U.S. Steel’s stock price.

Impact of Imposition of Anti-dumping Duties on Steel Imports on U.S. Steel

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. ^[4] Two important reasons for the increase in steel sheet imports are the strengthening of the U.S. Dollar and the sharp increase in Chinese steel exports. 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.

The U.S. Dollar has strengthened considerably over the course of the last twelve months. The Dollar Index, which is a measure of the strength of the Dollar against a basket of other currencies, currently stands at 95, as compared to 80 twelve months ago. ^[5] A higher value of the Dollar Index implies a stronger U.S. Dollar.

Dollar Index

(Source: Bloomberg)

Though the reasons for the strengthening of the Dollar are manifold, basically a strong U.S. economy relative to other developed economies has helped attract foreign capital flows. The strengthening of the Dollar has made cheap steel imports even cheaper in Dollar terms, which has boosted foreign imports.

In addition to the strengthening of the Dollar, there has been a sharp increase in steel exports from China. The Chinese steel industry is currently facing weak domestic demand, primarily due to a slowing Chinese economy. Domestic demand for steel stood at 711 million tons in 2014. ^[6] In comparison, Chinese steel production in 2014 stood at 823 million tons in 2014. ^[7] This oversupply situation in the Chinese domestic steel market has provided a sharp boost to Chinese steel exports, which rose 36% year-over-year in the first four months of 2015. ^[3]

The net result of the surge in steel sheet imports has been a reduction in shipments and realized prices for U.S. Steel’s Flat-rolled Steel division. A final ruling on the petition by the domestic steel industry to impose anti-dumping duties on steel imports is expected by 2016. ^[3] If this ruling is in the domestic steel industry’s favor, it would boost shipments, realized prices, and margins for the Flat-rolled division. In order to model this scenario, we will factor in a 5% increase in both flat-rolled shipments and realized prices by 2021, as well as a corresponding increase in margins for the division. If we factor in these assumptions into our model, our price estimate increases by around 20% from $23.76 to $28.45. Thus, if anti-dumping duties are imposed on steel imports, an upward revision in valuation could potentially follow for U.S. Steel.

See our complete analysis for this scenario here

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1. U.S. Steel’s 2014 10-K, SEC [↩]
2. U.S. Steel’s Q1 2015 Earnings Release, SEC [↩] [↩]
3. U.S. Steelmakers Seek Antidumping Action Against China, Four Others, Wall Street Journal [↩] [↩] [↩]
4. U.S. Steel’s Q1 2015 10-Q, SEC [↩]
5. Dollar Index, Bloomberg Business [↩]
6. Short Range Outlook 2015-16, World Steel Association [↩]
7. World Crude Steel Production, World Steel Association [↩]