Here’s Why We’re Revising Our Price Estimate For U.S. Steel to $16

-12.25%
Downside
41.02
Market
36.00
Trefis
X: United States Steel logo
X
United States Steel

The U.S. steel industry is facing challenging market conditions. Competition from cheap steel imports and subdued demand conditions have negatively impacted the prospects of domestic steelmakers such as U.S. Steel (NYSE:X). The company recently announced the permanent closure of its blast furnace and most of the associated steelmaking operations in Fairfield, Alabama. [1] The closure of the Fairfield, Alabama facilities is indicative of the adverse business environment facing U.S. Steel. In light of the prevailing business conditions, we are revising downward our price estimate for the company.

Challenging Business Conditions

Domestic steelmakers have been adversely impacted by a surge of cheap steel imports. Steel imports have been boosted by the strengthening of the U.S. Dollar against global currencies, which has made these imports cheaper in Dollar terms. Steel sheet imports to the U.S. accounted for 22% of the domestic market in 2014, much higher than the figure of 15% in 2013. [2] The largest share of these steel imports originates from China, largely as a result of the prevailing oversupply in Chinese domestic steel markets. Chinese steel production stood at 823 million tons in 2014. [3] However, steel production in China comfortably exceeded demand in 2014, which stood at 711 million tons. [4] Oversupplied Chinese domestic steel markets have provided a boost to steel exports from China, which rose 27% year-over-year in the first seven months of 2015. [5]

Relevant Articles
  1. Can U.S. Steel Stock Return To Pre-Inflation Shock Highs?
  2. What’s Happening With U.S. Steel Stock?
  3. Will U.S. Steel Stock Continue To Outperform Despite Economic Headwinds?
  4. Is U.S. Steel Set For Tough Q3 Results?
  5. Why We Are Cutting Our Price Estimate For U.S. Steel Stock
  6. How Will U.S. Steel Stock Fare In An Uncertain Economy?

As per U.S. Steel management, a large proportion of steel imports to the U.S. are priced unfairly low. [6] Domestic steelmakers have sought the imposition of antidumping duty on these steel imports. [7] However, in the absence of any regulatory intervention, competition from cheap steel imports has reduced demand for steel from domestic steelmakers, driven down steel prices in the U.S., and negatively impacted steelmakers’ margins. The following figure illustrates the decline in average realized prices for U.S. Steel’s U.S. Flat-rolled steel division.

Realized Prices for U.S. Flat-rolled Steel Division, Source: U.S. Steel SEC filings

Besides the competition from steel imports, demand for steel has been fairly subdued in North America this year. The World Steel Association expects steel demand in the North American Free Trade Agreement (NAFTA) region to decline by 0.9% in 2015. [8] This is partly due to the high base effect, with demand increasing by 12% in 2014, which was higher than expected. [9] Thus, the steel industry is facing a challenging business environment.

Trefis Price Estimate

As a result of the challenging business conditions facing U.S. Steel, we have revised down our expectations for shipments, realized prices, and margins for the company’s U.S. Flat-rolled steel division. We have revised down our price estimate for the company’s stock to $15.63, which is 20% lower than our previous estimate. The new estimate is a better reflection of the challenges that U.S. Steel is currently facing.

View Interactive Institutional Research (Powered by Trefis):
Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research

Notes:
  1. U. S. Steel Proposes Permanent Closure of Blast Furnace and Most Flat-Rolled Finishing Facilities in Alabama, U.S. Steel News Release []
  2. U.S. Steel’s Q1 2015 10-Q, SEC []
  3. World Crude Steel Production, World Steel Association []
  4. Short Range Outlook 2015-16, World Steel Association []
  5. Steel Exports Jump From China Expanding Glut, Hurting Mills, Bloomberg []
  6. U.S. Steel’s Q2 2015 Earnings Call Transcript, Seeking Alpha []
  7. U.S. Steelmakers Seek Antidumping Action Against China, Four Others, Wall Street Journal []
  8. Short Range Outlook 2015-2016, World Steel Association []
  9. Short Range Outlook 2014-2015, World Steel Association []