U.S. Steel Company
- U.S. Flat Rolled constitutes 74% of the Trefis price estimate for U.S. Steel's stock.
- European Flat Rolled and Tubular constitutes 23% of the Trefis price estimate for U.S. Steel's stock.
WHAT HAS CHANGED?
- Latest Earnings Performance
- US Steel's revenue increased by a whopping 140% (y-o-y) to $5.025 billion in Q2 2021. Flat-rolled results improved due to higher steel demand across most consumer and manufacturing industries, pushing both spot and contract prices higher. In Mini Mill, with the acquisition of Big River Steel on January 15, 2021, results were added for the first time in 2021. USSE results improved due to stronger performance of the manufacturing and construction sectors and higher selling prices though continued high levels of imports persist. However, in Tubular, net sales increased only slightly in Q2 2021 and decreased in the six months ended June 30, 2021 as disruptions in the oil and gas industry continue to create significant reductions of drilling activity in the U.S. and continued high levels of tubular imports persist. The company reported an EPS of $3.75 per share in Q2 2021, compared to a loss of $3.36/share in Q2 2020.
- Effect of Coronavirus
- The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. The steel demand from industry players affects global steel price levels, in turn impacting the company’s price realization for its products. Lower demand from construction and automobile players, led to a drop in global steel prices in the first half of 2020, which had already seen a drop due to the U.S.-China trade war. The pandemic led to the company's stock price dropping from $11 at the beginning of 2020 to below $5 in March 2020. However, with the gradual lifting of lockdowns and increase in raw steel capacity utilization over recent months, the stock has surpassed its pre-Covid high of this year and is currently (25th August 2021) trading at near $28.
- Deal with Stelco
- On 30th April 2020, U.S. Steel entered into a deal with Stelco Holdings, under which Stelco has an option to acquire a 25 per cent interest in the Minntac mine in Minnesota (which has annual production capacity of up to 16 million tons) to purchase iron ore pellets. Wholly-owned and operated by United States Steel, Minntac Mine is North America's largest taconite plant. Under the deal, Stelco has already paid United States Steel $20 million. Another $80 million will be paid over the remainder of 2020. Once Stelco has paid the remaining $80 million, the option can be exercised any time before January 31, 2027. Stelco would make an additional $500 million payment to acquire the 25% interest. This agreement delivers $100 million of incremental cash to US Steel's balance sheet in 2020. United States Steel would remain majority owner and operator of the taconite plant. The agreement implies a $2.4 billion enterprise value for Minntac Mine.
- Ownership interest in Big River Steel
- US Steel has closed its acquisition of a 49.9% ownership interest in Big River Steel for about $700 million, which implies an enterprise value of $2.325 billion. The company was accounting for its investment in Big River under the equity method as control and risk of loss are shared among the partnership members. On December 8, 2020, the Company exercised its option to acquire the remaining equity of Big River Steel. The acquisition closed on January 15, 2021.
- Imposition of punitive tariffs on steel imports into the U.S.
- Steel imports into the U.S. have risen sharply over the course of the past few years. The penetration of finished steel imports as a percentage of the U.S. domestic steel market peaked at 34.4% in 2014 and 33.8% in 2015, gaining momentum throughout the years. A significant proportion of U.S. steel imports are from developing countries which have low labor costs and low overall costs of production. Competition from these low-priced imports negatively impacted shipments and realized prices for the domestic steel industry. The U.S. Commerce Department under Pres. Trump's administration initiated a probe under section 232 of the Trade Expansion Act of 1962 to apprehend the impact of such imports on the U.S. national security. The recent positive findings of the probe have led to the imposition of 25% tariffs on U.S. steel imports. Data for the first 3 months of 2018 shows that US steel import decreased by 2.5% to 7.9 million metric tons from 8.1 million metric tons for the corresponding period in 2017. Also, the company's US shipments increased by 6.3% in 2018. Thus tariffs have helped boost the prospects of the domestic steel industries and hence enhanced the performance outlook for U.S. Steel.
- China's industrial production curtailment
- China has imposed strict regulations on its domestic production of steel in order to control its alarming levels of pollution prevalent in the country. China plans on reducing 150 million tons of steel production capacity by 2020 and has already shed 115 million tons of steel capacity between 2016 and 2017, with a further target of shedding 30 million tons in 2018. A decline in global steel supply has boosted steel prices and also reduced China's export position as the majority of its production is domestically consumed given the country's steady growth position. This is expected to remain beneficial for the overall global steel market.
- Recovery in global oil prices to support drilling activities in the U.S.
- Global energy sector has seen a recovery in oil prices since the Organization of Petroleum Exporting Countries (OPEC) decided to cut crude oil output and further extended it until the end of 2018. Brent crude oil prices surpassed $70 for the first time in 2 years with geopolitical uncertainty with respect to Iran sanctions providing additional support to the price. Higher oil prices have increased oil drilling activities in the U.S. which has remained beneficial for the U.S. Tubular product segment of U.S Steel. Though prices have come down from the recent highs of 2018, they are not expected to touch the lows experienced in 2015-2016. Thus, drilling activity would remain stable.
- Asset Revitalization Program
- The asset revitalization program is a comprehensive $2 billion (approx 1.5 billion in Capex) investment program aimed at improving the company’s efficiency, product quality, and lower its production costs. However, the implementation of this program has resulted in planned production outages in its U.S. Flat-Rolled division(as anticipated) and has been negatively weighing on the total shipments from the division.
- Potential impact of the federal government's infrastructure plan
- The U.S. government has planned an overhaul of domestic infrastructure, with a particular focus on transportation infrastructure. The implementation of this infrastructure plan, once it has been passed by Congress, is expected to sharply boost the demand for steel.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of U.S. Steel's value that present opportunities for upside or downside to the current Trefis price estimate for U.S. Steel:
U.S. Tubular Products division
- U.S. Tubular Products EBITDA Margin: The EBITDA Margin for the U.S. Tubular Products division fell to -48% in 2016 from 16% in 2014 due to a sharp reduction in the division's shipments as a result of a decline in demand for tubular steels with a decline in oil prices. However, with a recovery in oil prices, segmental EBITDA margin improved significantly to -1.6% in 2017 and 1.1% in 2018 due to a recovery in prices and productivity enhancement initiatives. If the recovery in margins is sharper than expected, and margins rise to 10% by the end of our forecast period as opposed to 2.5% in the base case, it would represent an upside of around 5% to the Trefis price estimate.
- U.S. Flat Rolled Products Average Price: We currently expect the average realized price for the U.S. Flat-rolled division to rise to $1060 per ton by the end of the forecast period post the imposition of import tariffs on several importing countries. However, if the recovery in realized prices is less than anticipated and the division's average realized price recovers to $950 per ton by the end of the forecast period, it would represent a downside of around 5% to the Trefis price estimate.
For additional details, select a driver above or select a division from the interactive Trefis split for U.S. Steel at the top of the page.
U.S. Steel is an integrated steel producer of flat-rolled and tubular products with major production operations in North America and Europe. An integrated producer uses iron ore and coke as primary raw materials for steel production. According to the latest World Steel Association's statistics, U.S.Steel is the twenty-sixth largest steel producer in the world.
U.S. Steel's operations have an annual raw steel production capability of 22 million tons, of which 17 million tons is located in North America and 5 million tons in Europe.
U.S. Steel is also engaged in other business activities, most of which are related to steel making operations, including transportation services (railroad and barge operations) and real estate operations.
SOURCES OF VALUE
Flat-Rolled products refer to the steel sheets and plates that are made by rolling processes. The various categories of the Flat-Rolled products include: hot rolled sheets, cold rolled sheets, coated sheets, semi-finished bars and plates, and tin mill products.
The U.S. Flat-Rolled division is the most valuable division for the firm for the following reasons:
Largest revenue generating division
The U.S. Flat-Rolled division generated 73% of U.S. Steel's total revenues in 2020 and is expected to contribute 74% in 2021, with segment revenues at $7.1 billion and $10.5 billion in 2020 and 2021, respectively. The EBITDA margin for the segment stood at around -1.3% in 2020. Revenue and margins for the division declined in 2020 due to impact of COVID-19 crisis but are expected to rise as improved economic and business conditions (resulting from the imposition of tariffs on foreign steel imports) result in higher demand for steel and the division's products.
Highest production capacity and sales volumes
The Flat-Rolled segment has an annual production capacity of 17 million tons. The division's steel shipments stood at 10.7 million tons in 2019 and 8.7 million tons in 2020, and would likely be 11.8 million tons in 2021, much higher compared to both the other segments.
Overcapacity in the steel industry
Overcapacity in the steel industry has hit margins for many operators, as steel mills globally are running at around 70% of their actual capacity on average. While this saves some costs, there are significant fixed costs that cause margins to compress when capacity is not optimal. However, as recently as December 2018, capacity utilization has improved to about 80%. Though capacity crashed to 50% in 2020 amidst the pandemic, it has since improved to 75% now. As demand bounces back and capacity is optimized, we expect a recovery in margins for the likes of U.S. Steel.
Increasing demand from emerging markets
As emerging economies such as India and China witness robust economic growth, the demand for steel in Asia is expected to grow at a healthy pace. This should help the steel industry solve its overcapacity issue to some extent, and allow manufacturers to eventually increase steel prices.
Economic recovery to drive demand
We expect that an economic recovery in the U.S. and Europe will drive industrial demand, which should, in turn, provide a boost to prices as well as shipments.