U.S. Flat-Rolled division has maintained its position as the largest segment for U.S. Steel Corp (NYSE: X) over recent years. U.S. Steel Revenues (shows US Steel’s key revenue components) have increased from $10.3 billion in 2016 to $14.2 billion in 2018, growing at a CAGR of 17.5%. During the same period, US Flat-Rolled segment saw its revenues increase from $7.5 billion in 2016 to $9.7 billion in 2018, at a CAGR of 13.6%.
A] Division Overview
What is on Offer?
The Flat-Rolled segment includes U. S. Steel’s integrated steel plants in North America involved in the production of slabs, strip mill plates, sheets and tin mill products, as well as all iron ore and coke production facilities in the United States.
Who is the Customer?
The Flat-Rolled segment is focused on customers in the following 3 categories:
- Automotive: provides solutions such as the next generation of advanced high strength steel (AHSS) to address challenges including increased fuel economy standards and enhanced safety requirements.
- Consumer Solutions: serves customers in the appliance, packaging, container, and construction markets.
- Industrial, Service Center and Mining Solutions: focuses on the Company’s customers in the service center business, pipe and tube manufacturing markets, and agricultural and industrial equipment markets.
The segment faces intense competition from other global steel giants such as A.K. Steel Holding Corporation, Nucor, and ArcelorMittal.
You can view the Trefis interactive dashboard – US Flat-Rolled Products: US Steel’s Primary Growth Driver – and alter the assumptions to arrive at your own estimates for the segment’s and company’s revenues and profitability. In addition, here is more Materials data.
B] Flat-Rolled Revenue Trend
- US Flat-Rolled segment has added $2.2 billion in revenues between 2016 and 2018, led by sharp increase in steel prices.
- Price realized increased from $744/ton in 2016 to $921/ton in 2018, driven by accelerated demand for steel products in line with the recent economic growth, as well as the supply-demand balance between imported and domestic steel.
- Additionally, the restart of the two blast furnaces at the Granite City Works during 2018 enabled the company to take advantage of the improved market dynamics with higher shipments.
- However, segment revenue is expected to decline in the next two years, driven by lower shipments.
- Decrease in shipments would reflect loss of volume from ongoing repair works at Great Lakes Works facility.
C] Revenue Share
- Despite increase in both, the segment as well as company’s revenue in recent years, flat-rolled products’ share in US Steel’s total revenue has fallen from 73.2% in 2016 to 67.7% in 2017.
- However, the share increased to 68.3% in 2018, at the cost of slowdown in the European operations.
- The metric is expected to continue rising in the near term, with US Flat-Rolled commanding a share of over 70% of the total revenue base, thus being the primary driver of the company’s revenue growth in the near term.
D] Asset Revitalization Program
- The asset revitalization program is a comprehensive $2 billion (approx. 1.5 billion in Capex) investment program aimed at improving the company’s efficiency, product quality, and lower its production costs.
- However, the implementation of this program is expected to result in planned production outages in its U.S. Flat-Rolled division which have been negatively weighing on the division’s total shipments in the near term.
- Increased spending and operating costs for flat-rolled segment (segment constitutes over 80% of capital spending under this program), is likely to have an adverse impact on segment margins in the near term.
E] More Profitable than the Company
- Healthy increase in revenue has led to flat-rolled operating profit margins to be higher than US Steel’s operating profit margins over recent years (except in 2017).
- Better profitability of the division was largely driven by higher average realized prices, increased shipments, improved market conditions, and lower energy cost.
- Additionally, a strong improvement in production capacity from 63% in 2016 to 70% in 2018, has led to higher productivity and cost reduction.
- Though segment margins are expected to drop in the near future, due to reduction in average realized prices, higher raw material costs, and increased spending for operating costs, they are still likely to be above the company operating margins (which are expected to be affected by continued slowdown in the Tubular segment and European operations).
Trefis estimates that despite a decrease in revenue and margins for the company and flat-rolled products, the division’s revenue share is expected to increase and profitability to be better than the company’s over the next two years. As per U.S. Steel Valuation (shows valuation analysis) by Trefis, we have a price estimate of $13 per share for US Steel’s Stock. Thus, though the company is expected to report subdued performance and slowdown in the European markets and Tubular division in the near term, the key factor that could drive the company’s long-term revenue growth, profitability improvement, enhanced shareholder returns, and elevated stock price, is a healthy and sustained performance in the US Flat-Rolled division.
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