U.S. Steel: The Year in Review

The year 2017 saw a revival in the fortunes of the domestic steel industry. However, U.S. Steel (NYSE:X) remained a major under-performer amid an environment of prospective business growth. This was mainly due to the ongoing asset revitalization program scheduled in the company’s U.S. flat rolled division which impacted the company’s shipment volume throughout the year. Thus, even though the regulatory intervention from U.S. authorities and the Chinese production curtailments have helped offset the adverse impact of competition from unfairly traded steel imports to a certain extent on the operations of domestic steelmakers, U.S. Steel has not been in a position to take complete advantage of this situation. In this article, we will take a look back at the salient developments of the year for U.S. Steel and what the next year holds for the company.

Favorable Market Conditions

The World Steel Association (WSA), as per its latest demand outlook, estimated the steel demand for 2017 from NAFTA and the European Union to rise at 4.9% and 2.5%, respectively. ^[1] This improved demand conditions were reflected in the sharp increases in steel prices reported by both the U.S. Flat-rolled and U.S. Steel Europe divisions of U.S. Steel. The company saw a 11% and 28% rise in its average price realized from its U.S. Flat-rolled and U.S. Steel Europe divisions in the first 9 month of 2017. ^[2] Steel prices have also been supported by the industrial production curtailments initiated in the Chinese economy in order to control its alarming levels of pollution. A fall in Chinese steel output has benefited global steel producers by reducing the overall steel supply glut and the foreign dependency on cheap steel imports.

Additionally, regulatory intervention aimed at discouraging unfairly traded steel imports helped negate the competition from these low-priced imports to the domestic steel industries in both the U.S. and Europe to a certain extent, allowing prices to rise with improving demand conditions.

Asset Revitalization Program Negatively Impacted Shipment Volume

U.S. Steel’s total Flat-Rolled shipments for 9 months ended September was down by 4%. ^[2] The decline in shipments was even greater during the first two quarters of the year, improving slightly in the third quarter. The company attributed the decline in shipments for this division to planned production outages as it embarked upon its ‘asset revitalization program,’ which is aimed at improving the efficiency, reliability, and product quality in addition to lowering production costs. ^[3] However, in doing so, the company is foregoing higher production levels during a favorable time period characterized by rising steel prices and demand for the commodity in key markets.

The implementation of the asset revitalization program is likely to negatively impact shipment levels over the next few years as the program is expected to occur in a phased manner, stretching for another two to three years beyond 2017. Concerns over the extent of the disruption had weighed on the company’s stock price, reviving by the end of the year as the production outlook for the company has become more foreseeable.

(Source:NASDAQ)

The Road Ahead

Despite the decline in the company’s shipment volume, U.S. Steel is expected to deliver a robust EBITDA of $1.075 billion for 2017, 111% improvement over 2016. ^[2] This is mainly driven by the prevalent favorable market conditions, including lower raw material prices and higher steel prices.

Although U.S. Steel was unable to take full advantage of favorable business conditions in 2017 as it continued to upgrade its production facilities, the company would be in a better position in 2018 to utilize the improved business prospects in the U.S., also indicated by the recent rally seen in its stock price.

We have $30 price estimate for U.S. Steel, below the current market price.

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

• Why We’ve Raised Our Price Estimate For U.S. Steel To $30
• OPEC’s Extension of Output Cuts Would Remain Beneficial for U.S. Steel

Notes:

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1. Short Term Outlook, World Steel Association [↩]
2. U.S. Steel Q3 10Q, U.S. Steel Earnings Release [↩] [↩] [↩]
3. U.S. Steel’s Q1 2017 Q&A, U.S. Steel Website [↩]