We have written a lot about U.S. Steel’s (NYSE:X) losses at its steel mills in Europe and America. However, there is still some upside to its North American steel shipments in 2012. If we take European sales and shipments out of the equation, the picture does not look so gloomy. Automotive sales have shown signs of recovery over the past few months. Moreover, there is significant demand potential for tubular steel from energy companies in the U.S. as they increase their drilling operations from shale oil and gas deposits. Below we take a look at the possible upside to steel sales in North America next year.^[1] U.S. Steel is primarily a manufacturer of flat rolled and tubular steel and competes with international steel companies like ArcelorMittal (NYSE:MT) in the American and European markets.

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Stronger Steel Demand

Steel companies have incurred a lot of losses due to the ripple effect of a slump in the European Union and debt concerns. However, the American market has shown signs of recovery and steel prices are up 25 percent since November. According to the Manufacturers Alliance for Productivity and Innovation, U.S. automotive companies will produce close to 13.4 million vehicles in 2011, a whopping 3 million vehicle increase from 2009.^[1] Consequently, cold rolled steel shipments were up 11.9 percent in U.S. for the first 10 months of 2011 compared to the same period last year. The European region may still see weakness in 2012, hurting some exports, but we expect domestic consumption to continue to drive sales in the U.S.

The buoyant prices of oil and natural gas have made drilling from shale deposits more profitable for crude oil and gas producers. We expect to see a rapid rise in drilling activities in the large deposits of the Utica and Marcellus shales. Kinder Morgan Energy Partners (NYSE:KMP) is aggressively investing in the expansion of its premier Trans Mountain Pipeline. Similarly Chesapeake Energy (NYSE:CHK) is also investing in setting up a network to distribute natural gas efficiently. Going forward, we see a big demand upside for tubular steel.

Curbs on Cheap Imports

Steel imports have risen 14.5 percent during the first ten months of 2011 compared to the same period last year. The stronger dollar has further reduced prices of imports from China and other developing nations that export steel. In one of our previous notes we discussed how the anti dumping regulations and countervailing duty on cheap imports may help revive domestic steel producers. With the rising steel demand in America, we expect U.S. Steel’s American arm to improve profitability.

Limited Exposure to Developing Nations Will Hurt

Although the American market’s prospects look bright for now, U.S. Steel continues to face significant losses at many of its steel mills in Europe. Unlike ArcelorMittal, U.S. Steel has limited exposure to developing countries in which there has been significant demand growth. The American steel industry is showing some signs of a revival, but the growth in these developing nations will likely continue to be stronger. The company may eventually have no choice but to expand into these markets.

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