U.S. Steel ( X )
will announce its fourth quarter earnings on Tuesday, January
29. We expect weaker revenues and profits compared to Q3 2012.
The economic environment in Europe remains challenging and the U.S.
economy is recovering slowly though the automobile and construction
sectors are showing encouraging trends.
China, on the other hand, is beginning to look good due to the
funds provided by the government for infrastructure creation.
However, those benefits will be only be realized in the first
quarter of 2013 and beyond. Higher demand for steel from China
could cause the steel prices to rise, resulting in higher revenues
for U.S. Steel. Also, a new phenomenon being witnessed is the
expansion in production capacity of steel spurred by the shale gas
revolution. Cheap natural gas is reducing cost of production for
steelmakers by acting as a substitute for coal in purifying iron
The overall effect of all these factors, however, has to take
into account the demand-supply dynamic. Currently, there are huge
production surpluses in China and Europe, and imported steel is
still coming into the U.S. in large quantities. The prices of steel
may thus stay depressed in the face of a supply glut, negating
advantages of lower costs and higher future demand.
United States Steel Corporation is an integrated steel maker
with a steel making capacity of around 30 million tons, and a
majority of its operations are located in North America and Eastern
Europe. Flat-rolled products, tubular products and U.S. Steel
Europe (USSE) are the company's three main reporting segments.
See Full Analysis of U.S. Steel
Prices Will Weigh On Earnings
We expect average realized prices to decline across the segments
as steel prices on the London Metal Exchange (LME) are trending
lower compared to the previous quarter. The ongoing European debt
crisis, slow Chinese growth in the previous quarter and mixed
reports about the U.S. economy have contributed to the decline
in steel prices on LME. (( Steel Billet Prices , LME))
We expect the company's margins to decline mainly on steel
pricing concerns and higher costs owing to higher iron ore prices
in the previous quarter. However, the company is looking at low
natural gas prices to cushion the impact. We expect the tubular
steel segment to have performed reasonably well due to demand from
the oil and gas exploration industry. However, given the typically
lower capital expenditure budgets of energy companies in the fourth
quarter of any year, we don't expect a stellar performance.
European shipments will continue to decline as the Eurozone is
still reeling with overcapacity in the industry. According to a
company presentation given in November, U.S. Steel has formed a
joint venture with Kobe Steel to produce light, ultra-high strength
steel to be used in automobile manufacturing. This grade of steel
is designed to meet the fuel efficiency requirements for
automobiles in the years ahead. Production is expected to begin in
The company is looking to sell its steel operations in Slovakia
where it operates through its subsidiary U.S. Steel Kosice
(USSK). It has reportedly been in negotiations with the Slovakian
government for the same over the last few days. The Slovakian
facility produces 5 million tonnes of steel. If the sale of
the Slovakian business goes through, it will end U.S. Steel's
presence in Europe. It has already sold its loss-making Serbian
operations in January this year. We think that the major factors
driving U.S. Steel's decision to sell the Slovakian business are
the bleak economic outlook in Europe and the potential financial
liabilities it may incur on account of new environmental
regulations to be enforced by January 2013.
U.S. Steel estimated in its latest 10-Q report that it will have
to spend $350-400 million by 2016 to comply with new European Union
( EU ) environmental
mandates that the Slovak Republic must adopt by January. The new
laws will also increase operating costs which U.S. Steel says it
cannot estimate right now.
We think that it is a bit early to estimate the overall impact
of the shale gas revolution on U.S. Steel. Shale exploration
increases the demand for tubular steel products, and subsequent
cheap natural gas prices help steel companies by acting as a
substitute for coal. So at first glance this should help both
revenues and lower costs.
However, cheap natural gas also encourages capacity expansion by
steel companies, leading to excess capacity and possibly lower
prices. The steel prices in the U.S. already bear the brunt of high
quantities of imports, particularly from China where iron ore is
cheap. A supply glut might cause prices to stay low even if demand
from China picks up.
We have a price estimate of $23 for U.S. Steel which will
be revised after the fourth quarter earnings results.
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