Trends Driving Our $20 Price Estimate For U.S. Steel

The U.S. steel industry is facing challenging times. A rising tide of cheap steel imports into the U.S. is steadily eating away at the market shares of domestic steel producers as well as driving down average realized prices. In addition, steel demand growth in North America has faltered this year, after a robust increase in demand last year. These developments have prompted us to revise various forecasts in our U.S. Steel model, resulting in a downward revision in our price estimate. In this article, we will take a look at the factors driving our new $20 price estimate for U.S. Steel.

Competition from Steel Imports

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. ^[1] 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 96, as compared to 80 twelve months ago. ^[2] 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 many, 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. ^[3] In comparison, Chinese steel production in 2014 stood at 823 million tons in 2014. ^[4] 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. ^[5]

Over and above the competition from steel imports, demand conditions for steel in North America are fairly subdued, 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. ^[6] This is partly due to the high base effect, with demand increasing 12% in 2014, which was higher than expected. ^[7] Weak growth in U.S. steel demand has further dampened the prospects of domestic steel companies such as U.S. Steel.

The negative impact of the combination of the factors discussed above was evident in U.S. Steel’s Q1 earnings 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. ^[8] 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). ^[8]

Considering the realities of the new competitive landscape, we have revised downwards are forecasts for realized prices and margins in our model for U.S. steel. The changes to our forecasts have culminated in our new price estimate for U.S. Steel, which stands at $20.44, around 14% below our previous estimate for the company.

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1. U.S. Steel’s Q1 2015 10-Q, SEC [↩]
2. Dollar Index, Bloomberg Business [↩]
3. Short Range Outlook 2015-16, World Steel Association [↩]
4. World Crude Steel Production, World Steel Association [↩]
5. U.S. Steelmakers Seek Antidumping Action Against China, Four Others, Wall Street Journal [↩]
6. Short Range Outlook 2015-2016, World Steel Association [↩]
7. Short Range Outlook 2014-2015, World Steel Association [↩]
8. U.S. Steel’s Q1 2015 Earnings Release, SEC [↩] [↩]