U.S Steel Q3 Preview: What We’re Watching Tuesday

U.S. Steel (NYSE:X) plans to announce its Q3 2011 earnings Tuesday. The company posted good results in the first half of the year and is well on it way to recover the losses of 2008 -2009. U.S. Steel’s European shipments may be hurt from the ongoing debt crisis, but it remains to be seen how the American market has fared in Q3. U.S. Steel competes with international steel companies like ArcelorMittal (NYSE:MT), BaoSteel, Posco (NYSE:PKX), Nippon Steel and ThyssenKrupp.

We have a $37 price estimate for U.S. Steel, which is around 20% ahead of the market price.

See our complete analysis for U.S. Steel’s stock

Cautious Recovery for U.S. Steel

Although the second quarter was marked with good realized prices for steel, high demand and robust sales, Q3 results may not be able to match up to the results in the previous quarter. The third quarter has been marked with volatility and cautious moves by the manufacturers and buyers who are bracing for a possible recession. North American shipments may not experience a decline as big as the European shipments, but the decline in the steel price due to the global loss in the demand will affect the company’s revenues and profits. Lower shipments will lead to lower capacity utilization in the mills, hurting margins further.

Companies Lowering the Steel Inventory

With the debt crisis looming, the industrial demand for steel had dropped significantly in the past few months as the companies look forward to lower their inventory of steel in order to prepare for any possible slowdown. For example, the estimates for car sales in the U.S. are lower than they were three months back.

In response, the steel bought by the automobile manufacturers will be lower during the past three months. Moreover, aluminum is replacing steel in automobiles as the manufacturers eye for better fuel efficiency. For additional info on the trend, refer to our detailed note on the usage of aluminum in the automobiles here.

The company will gain some respite from the demand for tubular products in U.S. as the companies like Kinder Morgan Energy Partners (NYSE:KMP) expand their natural gas and petroleum pipeline network to meet the rising demand and lower the operational and transportation cost of fuel. While other manufacturers like ArcelorMittal have significant exposure to the developing markets, U.S. Steel’s limited reach to U.S. and European markets poses demand side bottle-necks for the company. It will be interesting to see the company’s 2011 outlook in the new earnings releases.

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