U.S. Steel Q4 2015 Earnings Review: Competition From Steel Imports And Weak Steel Demand Negatively Impact Results

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U.S. Steel (NYSE:X) released its fourth quarter results on January 26 and conducted a conference call with analysts the next day. [1] As expected, the company’s results were adversely impacted by the challenging business conditions that it is facing, arising as a result of a combination of competition from cheap steel imports and weak demand conditions for steel. U.S. Steel’s adjusted EBITDA (which excludes the impact of one-time items on earnings) stood at a loss of $13 million in Q4 2015, as compared to a profit of $534 million in the corresponding period of 2014. [2] The most important takeaway from the earnings conference call was the management’s emphasis on controlling costs, with the prevailing adverse business conditions expected to persist in the first half of 2016.

Challenging Business Conditions

U.S. Steel’s operations, like those of other domestic steelmakers, have been adversely impacted by a surge in U.S. steel imports. The market share of steel sheet imports in the domestic market, which rose to 22% in 2014 from 15% in 2013, is expected to have risen further in 2015. [3] A sharp increase in Chinese steel exports and a strong U.S. Dollar were the main reasons for the surge in steel imports.

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Chinese steel exports have risen as domestic demand for steel in China has weakened. As a result of slowing Chinese economic growth, steel demand in China is expected to contract in 2016, following on from two consecutive years of declining demand. [4] Despite the weakness in domestic demand, Chinese steel production levels have continued to remain fairly high, resulting in an oversupply situation. As a consequence, Chinese steel exports exceeded 100 million tons in the first eleven months of 2015, around 22% higher year-over-year. [5] These imported steels are priced significantly lower than domestic steels, with domestic producers demanding the imposition of punitive tariffs on steel imports from several countries including China, contending that these imports are priced unfairly low. Moreover, the strengthening of the Dollar has made these imports cheaper still. Besides competition from steel imports, the weakness in the demand for steel in North America has added to the woes of domestic steel producers. As per World Steel Association estimates, steel demand in North America declined by around 0.9% for the full year 2015. [4]

A combination of competition from steel imports and weak demand conditions negatively impacted the results of the U.S. Flat-Rolled Steel division, the company’s largest division, which accounts for around two-thirds of its revenues. The division’s shipments and realized prices declined roughly 14% and 17% respectively on a year-over-year basis in Q4 2015. [6] Capacity utilization declined to 57% in Q4 2015, as compared to 75% in the corresponding period of last year, which is a reflection of the weakness in demand. [6]

Competition from steel imports also adversely affected Euro-based price realizations for U.S. Steel’s European operations, which declined 9% year-over-year in Q4 2015. [6] In Dollar terms, the decline in prices was much steeper at 20% year-over-year. [6] Dollar appreciation exacerbated the impact of weak demand conditions on the U.S. Steel Europe segment.

Lower Oil Prices Impact Tubular Products Segment’s Results

Brent Crude Oil Prices, Source: Y Charts

The decline in oil prices over the last twelve months, as illustrated by the chart shown above, has translated into a decline in oil and gas drilling activity. The U.S. rig count currently stands around 60% lower year-over-year, indicating weak drilling activity and consequently, lower demand for the Tubular Products segment’s Oil Country Tubular Goods (OCTGs), which account for most of the segment’s shipments. [7] As a result of the weakness in demand, the Tubular Products division’s shipments and realized prices declined 72% and 22% respectively year-over-year in Q4 2015. ((U.S. Steel’s Q4 2015 Earnings Release, SEC))

The Carnegie Way

U.S. trade authorities have issued a preliminary ruling in the steel imports case, imposing significant antidumping duties on steel imports from China. The final ruling is expected in mid 2016. Thus, the company is likely to witness subdued business conditions at least in the first half of 2016, though the preliminary imposition of duties on steel imports may positively impact the order books of domestic steel producers. The company management stressed that cost reduction and improvements in operational efficiency will continue to be the focus of U.S. Steel’s strategy in 2016. ‘The Carnegie Way’ is U.S. Steel’s umbrella initiative for cost reduction and improvements in operational efficiency. The company realized benefits of $815 million through The Carnegie Way initiative in 2015, as compared to $575 million in 2014. [2] Given that the domestic steel industry will continue to face adverse business conditions in the near term, U.S. Steel’s ongoing cost reduction and efficiency improvement initiatives will play an important role in supporting the company’s bottom line in the near term.

 

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Notes:
  1. U.S. Steel Q4 2015 Earnings Call Transcript, U.S. Steel Website []
  2. U.S. Steel’s Q4 2015 Earnings Presentation, SEC [] []
  3. U.S. Steel’s Q1 2015 10-Q, SEC []
  4. Short Range Outlook 2015-2016, World Steel Association [] []
  5. India Plans Price Curbs to Stem Chinese Steel Import Deluge, Bloomberg []
  6. U.S. Steel’s Q4 2015 Earnings Release, SEC [] [] [] []
  7. Rig Count Data, Baker Hughes []