U.S. Steel to Gain from Higher Steel Prices

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U.S. Steel ( X ) competes with international steel makers like ArcelorMittal ( MT ), BaoSteel, Posco ( PKX ), Nippon Steel and ThyssenKrupp. U.S. Steel's 2010 performance in terms of total shipments and raw steel capacity utilization rates improved compared to the very low levels of  2009, but the results were still low by historical standards. We except steel producers like U.S. Steel to show a gradual improvement as the economy recovers however excess capacity and rising production costs will provide headwinds.

We currently have a Trefis price estimate of $60.17 for U.S. Steel's stock , ahead of the current market price of $56.30.

For 2010, the company's operating income from North American Flat-rolled segment rose by over $1.1 billion over 2009, as it realized benefits of higher prices, volumes and utilization rates and lower energy costs. But these benefits were partially offset by higher raw materials costs and higher spending for facility repairs and maintenance. Overall these are signs that the global market is headed towards recovery, although at a slow pace.

We expect U.S. Steel to see modest growth in prices for its steel products in the coming years, as a result of excess capacity in steel industry and rising steel production costs. While we anticipate the average price will reach near $740 by the end of our forecast period, Trefis members predict the average price per tonne will reach closer to $800, implying an upside of 3% to our price estimate for X stock.

Steel Industry Faces Excess Capacity

The steel industry has been facing the problem of overcapacity for some time now. Most of the steel mills have been running at 70% capacity. With already low profit margins, it is unlikely that prices will fall any further. At the same time, we do not expect prices to increase sharply due to spare capacity.

At the end of 2009, China's crude steel production capacity was pegged at 700 million tons, but recorded an output of 567.84 million tons.. In response to the steel industry's production overcapacity, China was prompt in imposing a three-year ban in 2009 on applications to expand production or start new projects.

Rising Steel Production Costs

The fuel price rise hurt the steel industry badly as the production costs of iron-ore and steel increased considerably as fuel prices increased in late 2008. Moreover, the companies faced major losses as they had to lower the prices to clear inventory in a scenario of falling demand for steel. Prices of iron ore are expected to increase with the cost of coal and other fuels that are used in mining and refining the ore, as global industrial energy demand is expected to rise.

Our complete analysis for U.S. Steel's stock is here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: MT , PKX , X

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