Is Europe Proving To Be The Biggest Drag On U.S. Steel’s Growth?

After healthy growth in segment revenues and profitability over recent years, US Steel European (USSE) division is proving to be the biggest drag on growth for U.S. Steel Corp (NYSE: X). Lower steel prices, slowdown in Europe, and increased raw material cost has led to the segment becoming the worst performing division for the company in 2019, with the trend for the segment expected to remain similar in 2020 as well.

You can view the Trefis interactive dashboard – How Important Is The European Tubular & Flat-Rolled Products To US Steel Corp – to better understand the performance of the European division and arrive at your own estimates for its revenues and profits.

A] Division Overview

What is on Offer?

U.S. Steel’s European (USSE) flat rolled and tubular products division includes steel sheets and plates as well as tubular items like pipes that are made by rolling processes and are sold in the European markets. The segment produces and sells slabs, sheet, strip mill plate, tin mill products, as well as heating radiators and refractory ceramic materials.

Who is Paying?

USSE primarily serves customers in the Eastern European service center, conversion, transportation (including automotive), construction, container, appliance and electrical, and oil, gas and petrochemical markets.

Competition?

The segment faces intense competition from other global steel giants such as A.K. Steel Holding Corporation, Nucor, and ArcelorMittal.

B] USSE Revenue Performance

• USSE revenues have steadily increased over recent years, with the segment adding $1 billion to its revenue base between 2016 and 2018.
• USSE revenues increased from $2.2 billion in 2016 to $3.2 billion in 2018, led by a sharp increase in steel prices.
• Price realized per ton increased from $499 in 2016 to $718 in 2018, driven by improved market conditions in line with recent economic growth and favorable currency impacts.
• However, segment revenue base is expected to shrink in the near term, with revenues expected to drop to $2.7 billion in 2019.
• Lower revenues would primarily be driven by lower average realized prices and decreased shipments, primarily from increasing imports and adverse European Union economic conditions, and the weakening of the euro versus the U.S. dollar.

C] Revenue Share

• Despite increase in both the segment as well as the company’s revenue in recent years, USSE’s share in US Steel’s total revenue initially increased from 21.9% in 2016 to 24.1% in 2017, before witnessing a drop to 22.6% in 2018.
• The decrease in share was due to faster growth in the US operations.
• The revenue share of the segment is expected to further decrease to about 20.5% by 2020, as the US-based operations are expected to perform much better, thus increasing their share in total revenues, whereas the European growth and demand slowdown is expected to decrease the segment contribution to the company’s top line.

D] Segment Margins vs Company Margins

• Over the last three years, the European division has had a much better operating margin compared to the company as a whole.
• However, though the segment as well as the company’s margins are expected to drop in the next two years, the European segment’s operating margins are expected to be lower than the company’s margins in 2019 and 2020.
• Sharp deterioration in the USSE segment could primarily be a reflection of the sharp drop in revenues and higher raw material costs, primarily for iron ore, higher energy costs, increased operating costs, and increased costs for carbon dioxide (CO2) emissions allowance.
• However, a relatively stronger performance in the US-based segments is expected to keep the company’s margins at an elevated level compared to the slowdown-stricken European division.
• USSE operating margin is expected to come in at 1.8% and 1.5% in 2019 and 2020, respectively, as against 3.5% and 3.2% for US Steel Corp.

E] Conclusion

Trefis estimates that the slowdown in Europe, drop in price realization, and higher cost is expected to lead to lower revenues and sharp deterioration in profitability for the European division, with the segment proving to be the biggest drag on the company’s near-term growth.

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