U.S. Steel Earnings Review: Weak Market Conditions And Competition From Steel Imports Negatively Impact Q2 Results

U.S. Steel (NYSE:X) released its second quarter earnings results on July 28 and conducted a conference call with analysts the next day. ^[1] 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 net earnings, which exclude the impact of one-time items, stood at a loss of $115 million in Q2 2015, as compared to a profit of $25 million in the corresponding period of 2014. ^[2] 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.

Operational Performance

Steel shipments for the Flat-rolled Steel segment stood at 2.71 million tons in Q2 2015, as compared to 3.01 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] This was primarily because of a surge in the levels of cheap steel imports to the U.S., competition from which negatively impacted the company’s steel shipments in Q2. 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. ^[3] 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] Furthermore, the competition from cheap imports has driven down average realized prices for the division, which fell 12% year-over-year to $695 per ton (excluding the results of U.S. Steel Canada). ^[2] In addition to the competition from steel imports, prevailing demand conditions for steel in North America are fairly subdued, with the World Steel Association expecting steel demand in the North American Free Trade Agreement (NAFTA) region to decline by 0.9% in 2015. ^[5] This is partly due to the high base effect, with demand increasing by 12% in 2014, which was higher than expected. ^[6] Weak growth in U.S. steel demand has dampened the prospects of domestic steel companies such as U.S. Steel. Despite U.S. Steel’s cost reduction initiatives offsetting some of the negative impacts of the weak market conditions on the segment’s results, the Flat-rolled Steel division’s income from operations fell to a loss of $64 million in Q2 2015, as compared to a profit of $30 million a year ago. ^[2]

The U.S. Steel Europe (USSE) segment’s shipments rose to 1.09 million tons in Q2 2015, from 1.05 million tons in the corresponding period of 2014, despite planned maintenance outages for a portion of Q2. ^[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. ^[5] However, realized prices for the segment declined roughly 23% to $533 per ton in Q2 2015, primarily as a result of the strengthening of the U.S. Dollar against the Euro. ^[2] However, there was some deterioration in Euro-based prices as well. Despite the sharp fall in realized prices, the decline in the segment’s income from operations was less pronounced, falling from $38 million in Q2 2014, to $20 million in Q2 2015. ^[7] This was primarily because of lower raw materials costs. The prices of iron ore, which is the chief input in steel-making, have fallen over 40% over the last twelve months, due to a global oversupply situation. ^[8]

Iron Ore Prices, Source: Y Charts

Impact of Low Oil Prices on Tubular Products Segment

The decline in oil prices over the last twelve months has negatively impacted the Tubular Products segment’s prospects. The 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.

Brent crude oil spot prices currently stand at levels of $56 per barrel, around 45% lower year-over-year. ^[9] As a result of the decline in oil prices, there has been a substantial reduction in drilling activity. This is reflected in U.S. rig count data, which stood at 876 at the end of last week, around 53% lower year-over-year. ^[10] As a result, the division’s shipments declined 79% year-over-year to 92,000 tons. ^[2] However, 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. ^[11] 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 12% year-over-year to $1,651 per ton in Q2 2015, as a result of the imposition of anti-dumping duties on steel imports. ^[2] Despite the boost from better pricing, the segment’s income from operations fell to a loss of $66 million in Q2, down from a profit of $47 million in the corresponding period a year ago, as a result of the sharp reduction in shipments. ((U.S. Steel’s Q2 2015 Earnings Release, SEC))

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 specific areas where The Carnegie Way benefits have been realized during its conference call. Improvements in manufacturing processes and supply chain and logistics are the main areas where the benefits of initiatives undertaken under The Carnegie Way have been realized. ^[12]

Projects undertaken under this initiative translated into an improvement in margins to the tune of $575 million in 2014. ^[13] In addition, the company estimates that additional benefits of around $590 million will be realized through The Carnegie Way initiative in 2015. ^[3] Given the subdued market conditions for steel, this ongoing initiative will boost the company’s results going forward.

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1. U.S. Steel Second Quarter 2015 Earnings Conference Call and Webcast, U.S. Steel Website [↩]
2. U.S. Steel’s Q2 2015 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
3. U.S. Steel’s Q2 2015 Earnings Call Transcript, Seeking Alpha [↩] [↩]
4. U.S. Steel’s Q1 2015 10-Q, SEC [↩]
5. Short Range Outlook 2015-2016, World Steel Association [↩] [↩]
6. Short Range Outlook 2014-2015, World Steel Association [↩]
7. U.S. Steel’s Q1 2015 Earnings Release, SEC [↩]
8. Iron Ore Spot Price Chart, Y Charts [↩]
9. Brent Crude Oil Spot Prices, Y Charts [↩]
10. U.S. Rig Count, Baker Hughes [↩]
11.  U.S. steel pipe makers win key anti-dumping case against cheap imports, Reuters [↩]
12. U.S. Steel’s Q2 2015 Earnings Presentation, U.S. Steel Website [↩]
13. U.S. Steel’s Q4 2014 Earnings Presentation, SEC [↩]