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Liquidity Concerns Rise Over US Steel

U.S. Steel (NYSE:X) recently saw its Issuer Default Rating (IDR) pushed down to "BB" from "BB+" by Fitch Ratings. Fitch revealed that the ratings have been downgraded because of the steel company's higher-than-expected cash outflow in 2010, as well as an extended period of high financial leverage. We look at this downgrade and assess the outlook for US Steel. The company competes with international steel giants like ArcelorMittal (NYSE:MT), BaoSteel, Posco (NYSE:PKX), Nippon Steel and ThyssenKrupp.

U.S. Steel produces and sells flat-rolled and tubular products largely in North America and Europe and is currently the tenth largest steel producer in the world with an annual raw steel production capability of 31.7 million tons. We currently maintain our price estimate for U.S.Steel at $48 , implying a roughly 10% premium to market price.

Low Capacity Utilization has Hit Operating Margins

US Steel reported an $86 million loss in the first quarter of 2011. While this is an increase from last quarter, operating margins for the company are still lower than key competitors such as ArcelorMittal. This was in a large part attributable to low capacity utilization rates in North America for US Steel, which continues to build a large fixed cost base for the company operations - sucking a substantial amount of the company's free cash.

But Rising Steel Prices Should Provide some Respite in the future

With the global economy recovering and US Steel demand recovering from the slump, s teel prices are expected to continue their upward trend for the remainder of 2011. This should help revenues for the year, and give the company's falling cash balance a hand.

However, the company has to continue to work on reducing its fixed costs in order to at least meet industry benchmarks.

See our full analysis for U.S. Steel

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


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

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