U.S. Steel Q4 2015 Earnings Preview: Challenging Business Conditions To Weigh On Results

U.S. Steel (NYSE:X) will release its fourth quarter results on January 26 and conduct a conference call with analysts the next day. ^[1] We expect the challenging business conditions affecting the U.S. steel industry, arising primarily as a result of competition from cheap steel imports, to negatively impact the company’s Q4 results. Competition from cheap imports is likely to adversely impact both shipments and realized prices of the U.S. Flat-rolled steel division, which accounts for nearly two-thirds of U.S. Steel’s revenues. ^[2] Weak oil and gas drilling activity will negatively impact the results of the Tubular Products segment, which primarily produces steels used in oil and gas drilling. In addition, U.S. Steel’s European operations will be negatively impacted by the strengthening of the Dollar against the Euro over the past year. The impact of these top line headwinds on U.S. Steel’s profits will be partially offset by the company’s ongoing endeavor to reduce operating costs and increase operational efficiency, known as ‘The Carnegie Way.’  In this article, we will take a look at what to expect from U.S. Steel’s Q4 results.

Challenging Business Conditions

A rising tide of cheap steel imports, particularly from China, has adversely affected the fortunes of the U.S. domestic steel industry. The market share of steel sheet imports, which rose to 22% of the domestic market in 2014 from 15% in 2013, is expected to have risen further in 2015. ^[3] Besides a surge in Chinese exports, the strengthening of the U.S. Dollar, which has made steel imports cheaper in Dollar terms, has also expedited the sharp growth in U.S. steel imports.

China is currently characterized by subdued domestic demand for steel and high production levels. Whereas Chinese domestic demand for steel stood at 711 million tons in 2014, steel production stood at 823 million tons. ^[4] The disparity between demand and production reflects the prevailing oversupply of steel in China, which has provided a sharp boost to the country’s steel exports. Chinese steel exports exceeded 100 million tons in the first eleven months of 2015, around 22% higher year-over-year. ^[5] In addition to competition from steel imports, prevailing demand conditions for steel in North America are fairly subdued as well. As per World Steel Association estimates, steel demand in North America declined by 0.9% for the full year 2015. ^[6] This was partly due to the high base effect, with demand increasing by 12% in 2014, which was higher than expected. ^[7]

The U.S. Dollar has strengthened considerably over the course of the last twelve months, as indicated by the Dollar Index, which is a measure of the strength of the Dollar against a basket of other currencies. ^[8] A higher value of the Dollar Index implies a stronger U.S. Dollar. A stronger Dollar has made steel imports cheaper, exacerbating the impact of surging Chinese steel exports. A combination of these factors will adversely affect pricing and shipments for the U.S. Flat-rolled division in Q4 2015.

Dollar Index, Source: Bloomberg

A stronger Dollar will also negatively impact realized prices for U.S. Steel’s European operations in Dollar terms. The segment’s average realized price in Dollar terms declined roughly 24% year-over-year in the first nine months of the year, primarily as a result of the strengthening of the Dollar against the Euro. ^[2] Weaker Dollar-denominated prices will exert top line pressure on U.S. Steel’s European operations in Q4 2015 as well.

Impact of Lower Oil Prices on Tubular Products Segment

Brent Crude Oil Prices, Source: Y Charts

Oil prices have declined sharply over the course of the past year due to a global supply glut, as illustrated by the chart shown above. The decline in oil prices has negatively impacted drilling activity in the U.S., indicated by the sharp reduction in U.S. rig count data, which stood roughly 60% lower year-over-year in the middle of January. ^[9] Weak drilling activity has negatively impacted the demand for U.S. Steel’s Tubular Products division, which primarily produces steels commonly known as oil country tubular goods or OCTGs, which are sold to customers in the oil and gas space. The Tubular Products division’s shipments declined roughly 64% year-over-year in the first nine months of 2015. ^[2] Weak drilling activity will negatively impact the division’s shipments in Q4 2015 as well.

The Carnegie Way

U.S. Steel’s ongoing cost reduction and efficiency improvement initiative, known as ‘The Carnegie Way,’ will provide some respite to the company’s profits from the severe top line headwinds. Projects undertaken under The Carnegie Way initiative are expected to boost margins to the tune of $715 million in the full year 2015, as compared to $575 million worth of benefits realized in 2014. ^[10] Given the challenging market conditions for steel, The Carnegie Way will help somewhat prop up the company’s bottom line. However, as a result of the bleak business environment, U.S. Steel’s results are likely to suffer in Q4 2015.

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1. United States Steel Corporation 2015 4th Quarter Earnings Call & Webcast, U.S. Steel Website [↩]
2. U.S. Steel’s Q3 2015 10-Q, SEC [↩] [↩] [↩]
3. U.S. Steel’s Q1 2015 10-Q, SEC [↩]
4. World Crude Steel Production, World Steel Association [↩]
5. India Plans Price Curbs to Stem Chinese Steel Import Deluge, Bloomberg [↩]
6. Short Range Outlook 2015-2016, World Steel Association [↩]
7. Short Range Outlook 2014-2015, World Steel Association [↩]
8. Dollar Index, Bloomberg Business [↩]
9. U.S. Rig Count, Baker Hughes [↩]
10. U.S. Steel Q3 2015 Earnings Presentation, U.S. Steel Website [↩]