VALUATION HIGHLIGHTS

1. U.S. Flat Rolled constitutes 59% of the Trefis price estimate for U.S. Steel's stock.
2. European Flat Rolled and Tubular constitutes 26% of the Trefis price estimate for U.S. Steel's stock.
3. U.S. Tubular constitutes 15% of the Trefis price estimate for U.S. Steel's stock.

WHAT HAS CHANGED?

1. Nippon Steel To Buy U.S. Steel
   • Nippon Steel will buy U.S. Steel for $14.9 billion after it won an auction for the 122-year-old American steelmaker. The all-cash deal values U.S. Steel at $55 per share, representing a 40% premium. The deal is expected to close in the second or third quarter of 2024, subject to regulatory approvals.

2. Latest earnings - Q2 2023
   • U.S. Steel posted a better-than-expected set of Q2 2023 results, although revenues and earnings were weighed down by weaker pricing versus last year. While the company's Q2 revenues came in at about $5.01 billion, marking a decline of 20% versus last year, adjusted earnings stood at $1.92 per share.

3. Near-term economic headwinds
   • There are a couple of factors clouding the outlook for the steel industry. The U.S. Federal Reserve and other major central banks have been hiking interest rates. This could result in a hard landing for the U.S. economy, leading to lower demand from key steel consumers such as the automotive and construction industries. There are also concerns about demand from China as its real estate market faces a big downturn. This could also impact the global steel market as China is the world's largest steel consumer.

4. Potential impact of the federal government's infrastructure plan
   • The U.S. government has planned to overhaul domestic infrastructure, focusing on transportation infrastructure. Once passed by Congress, implementing this infrastructure plan is expected to boost the steel demand sharply.

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 stood at -18% in 2020 although it rose to about 40% in 2022, driven by surging prices. However, we expect margins to stabilize at about 15% in the long term. However, if margins grow to about 22% by the end of the review period, there could be a 10% upside to our 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 $1,060 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.

BUSINESS SUMMARY

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 statistics, U.S. Steel is the twenty-sixth largest steel producer globally.

U.S. Steel's operations have an annual raw steel production capability of 22 million tons, of which 17 million tons are located in North America and 5 million tons in Europe.

U.S. Steel is also engaged in other business activities related to steel-making operations, including transportation services (railroad and barge operations) and real estate operations.

SOURCES OF VALUE

Flat-Rolled products refer to steel sheets and plates made by rolling processes. The various categories of 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 60% of U.S. Steel's total revenues in 2022 and is expected to contribute 56% in 2023.

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, which would likely be 11.8 million tons in 2021, much higher than the other segments.