Why We’ve Raised Our Price Estimate For U.S. Steel To $30

-11.73%
Downside
40.78
Market
36.00
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United States Steel

U.S. Steel (NYSE:X) reported better than expected results by beating market estimates by roughly 30% in its latest quarter. The U.S. steel industry as a whole has seen an increase in domestic demand for steel given the trade restrictions imposed on Chinese steel imports and a general improving economic condition in the country. Year-to-date steel shipments in the U.S. as of October was 4.8 percent higher compared to the same period in 2016. [1]

Increased Optimism Regarding the Outcome of Section 232 Probe

The outcome of the ongoing Section 232 investigations into the impact of steel imports on U.S. Security are due in mid-January. The subsequent action that would be taken by the U.S. administration based on this outcome would have a significant impact on the U.S. steel industry. The U.S. steel community is anticipating a strict action by the U.S. Commerce Department given the recent increase in tariff imposed on Chinese originated Vietnamese steel.

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The U.S. Commerce Department had initiated a probe against Vietnamese steel imports into the U.S. in November which unveiled that China has been using Vietnam to import its steel products in order to circumvent the tariffs levied by the U.S. on Chinese steel imports. Although these steel are further processed in Vietnam, around 90% of its value is derived from China. As per the findings of the U.S. Commerce Department, import of cold-rolled steel from Vietnam has increased by greater than 2500% post the imposition of tariffs on Chinese steel imports since 2015. (from $11 million to $295 million) [2] This has led to the U.S. increasing their tariffs on Vietnamese steel imports.

Thus, considering the U.S. treatment against China’s circumventing trade, it is increasingly likely that the findings of the Section 232 investigation would result in the U.S. imposing even higher tariffs against Chinese steel imports and thus would help increase the domestic demand for steel and remain an upside for U.S. Steel’s Flat Rolled division.

Recovery in the U.S. Tubular Segment

Crude oil has seen a recovery in its prices this year due to the production cut initiated and extended by the Organization of Petroleum Exporting Countries (OPEC) since January 2017. OPEC decided to cut crude oil output by 1.8 million barrels per day from January 2017 and is likely to continue their cuts until the end of 2018. [3] The improved pricing environment for crude oil has helped recover the oil and gas drilling activities in the U.S., which in turn has translated into higher demand for Oil Country Tubular Goods or OCTGs and an increase in the Tubular Product division’s shipments. Furthermore, an increase in demand for OCTGs has resulted in better price realizations for the company’s Tubular segment.

We expect the Tubular section to reflect a Y-o-Y (Year-on-Year) recovery of 75% in its shipment volume and 15% recovery in its price realization. The division is expected to contribute 8% to the the total revenue vis-a-vis a 4% contribution in 2016.

Thus, with the above stated supportive arguments for U.S. Steel, we have raised our price estimate for the company by 20%.

Have more questions about U.S. Steel? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for U.S. Steel

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Notes:
  1. October Steel Shipments Up 12.8 Percent From October 2016, American Iron and Steel Institute []
  2. U.S. slaps duties on Vietnamese steel originating from China, Reuters []
  3. OPEC, Russia agree oil cut extension to end of 2018, Reuters []