U.S. Steel's Corporate Culture And Its Poor Financial Performance

| About: United States (X)

As year-end financial results are published for major global steelmakers, it is hard to see why there is investor interest in major global steelmakers, other than those with operations in the United States or China.

The outlook for steelmakers with U.S. operations remains good, due to the strength of the U.S. auto industry, and the demand for drilling pipe for oil and gas exploration and development. It's still difficult for major U.S. steelmakers to make much of a profit, and I don't expect the profitability of U.S. steelmakers to improve much this year or next year, although the profitability of Nucor Corp. (NYSE:NUE) is an exception.

If the future for steelmakers with U.S. operations is OK, the future for steelmakers with European operations is gloomy. European steelmakers are being affected by a number of factors. The general contraction of the European economy has hit construction and basic manufacturing hard, both large users of steel. European steelmaking overcapacity, and the inability of the industry to permanently reduce the capacity is also impacting producers.

The bright spot in the global steel industry is China. I believe that Chinese steelmakers should be on the radar screens of more investors. China is the world's largest steel producing country, and its crude steel production is expected to increase 4.6% this year to a record 7.5 million tonnes. For 2012 China's demand for steel increased 3.1% over 2011.

Chinese steel production is likely to continue to increase as governmental approval is obtained for major projects, including dams, hydroelectric facilities, nuclear facilities, ports, railroads and construction projects in rural areas.

But, China is definitely complicated and there are numerous factors that affect the country's steel industry. These include the continued consolidation of the industry, and despite an increase in steel demand this year, likely pressure on operating margins.

A starting point in comparing global steelmakers with Chinese steelmakers is to look at valuations and P/Es.

The following are P/Es of three global steelmakers:

  • ArcellorMittal (NYSE:MT) is not profitable, but its shares are trading at a forward P/E for the year-ending December 31, 2014 of 10.65.
  • Nucor Corp. (NUE) is profitable and its shares are trading at a P/E of 30.04.
  • United States Steel (NYSE:X) is not profitable, but its shares are trading at a forward P/E, for the year ending December 31, 2014 of 16.79.

The following are the P/Es of three steelmakers with Chinese operations:

  • China Industrial Steel (OTCPK:CDNN) is profitable and its shares are trading at a P/E of 3.78.
  • Sutor Technology Group (SUTR) is profitable, and its shares are trading at a P/E of 4.62.
  • China Gerui Advanced Materials Group (NASDAQ:CHOP) is profitable and its shares are a trading at a P/E of 3.28.

United States Steel Corp.

I took another look at United States Steel Corp's fourth quarter 2012 earnings call transcript.

I don't want to minimize the importance of worker safety to a company such as U.S. Steel. But, John Surma, the company's CEO and chairman started the earnings call with an update on the company's efforts toward improving worker safety. He not only apparently believed that the inclusion of a discussion regarding worker safety was appropriate for an earnings call, but also that it needed to be highlighted at the beginning of the call. I question whether worker safety initiatives should even be included in an earnings call, unless they directly tie to the company's financial performance. As one could imagine, there were no follow-up analyst questions regarding worker safety.

Surma's leading the conference call with statements about worker safety caused me to question the entire corporate culture at U.S. Steel. Specifically, I'm wondering whether the company's corporate culture is about generating returns for shareholders, or instead one of being focused on being politically correct, and not trying to upset labor unions or Washington. There is no question that labor relations are important to U.S. Steel, and that I understand.

I also have come to the conclusion that major U.S. companies, Americans who have accumulated wealth, investors in general and capitalism itself, are all being seen by many political leaders in Washington as well as many Americans as the cause of America's economic problems and the country's high unemployment. If I'm right about the corporate culture at U.S. Steel, I'm wondering whether the corporate culture itself, from the top management to the workers in the mills is a drag on the company's financial performance. The answer to this will only be apparent over time, by the only way investors can evaluate any company, which is by financial results.

U.S. Steel's market capitalization is $3.28 billion. Due to its lack of profitability, the company doesn't have a current P/E, but it has a forward P/E of 10.5 for the year ending December 31, 2014. Yes, a forward P/E for 2014, as it is unlikely that U.S. Steel will be profitable this year.

For the fourth quarter of 2012, U.S. Steel reported a net loss of $50 million, or $.35 per share, on $4.487 billion of revenues. This compares to a net loss of $211 million on revenues of $4.819 billion for the same quarter in 2011.

For all of 2012, the company reported a net loss of $124 million, or $.86 per share, which included a loss of $353 million attributable to the sale of its U.S. Steel Serbia operations. Even after adjusting for the losses from the sale of its Serbian business, the company's 2012 financial results are substantially worse than the company's 2011 financial results. In 2011 the company generated revenues of $19.884 billion and had a net loss of $53 million, or $.37 per share, which included an $11 million after tax charge for environmental remediation expenses.

In its earnings release, U.S. Steel indicated that while overall steel consumption had increased, steel consumption in the U.S. and eurozone had not returned to the levels prior to the global financial crisis of 2008.

U.S. Steel has been benefiting from both the robust U.S. auto market as well as the demand for tubular steel by the oil and gas industry, which will likely continue, at least for the first half of this year.

I guess I'm a bit old fashioned, but I believe that dividends should only be paid when there are profits. On January 29th U. S. Steel declared a dividend of $.05 per share. The company indicated that it had a strong liquidity position, which as of the end of 2012 consisted of $570 million in cash. But, I'm wondering whether-- due to the lack of profitability, and what I see as continuing lack of profitability for at least the rest of this year-- the company should be paying dividends.

I believe that U.S. Steel's revenues will increase, and losses will likely decrease, at least for the first half of this year. But, I don't think that the company will regain profitability any time soon, and as a result, I don't see it being attractive for investment.

Sutor Technology Group Limited (SUTR)

Sutor Technology Group is a China based manufacturer of steel products and welded steel pipes. The Company converts steel manufactured by other companies to finished steel products, including hot-dip galvanized steel, pre-painted galvanized steel, acid-pickled steel, cold-rolled steel and welded steel pipe products.

For the three months ended December 31, 2012, the second quarter of the company's fiscal year, the company's revenues were $157.9 million, compared to $107.9 million for the same quarter of 2011. Its net income for the quarter was $4.8 million, compared to $2.8 million for the same quarter of 2011, an increase of over 71%. Both the increase in revenues and net income for the quarter are impressive. The company's increase in financial performance reflects the turnaround of China's steel industry, which likely began in middle of the third quarter of last year, as well as the stronger prospects for China's economy.

Sutor Technology is a smaller capitalization company. Its market capitalization is $56 million and its shares are trading at a P/E of 5.15. Since I first wrote about Sutor Technology at Seeking Alpha in late December, the company's shares are up approximately 40%.

China Industrial Steel Inc. (CDNN.OB)

China Industrial Steel produces and sells steel billet, steel plate and steel bar primarily for the domestic Chinese market.

The company's steel plate, steel wire and steel bar are primarily used in the construction of buildings and in large scale infrastructure projects, including roads and bridges. The company's steel plate is also utilized by the ship building industry, and in the construction of pipelines. An additional company product is steel billet, a semi-finished product, which is utilized as a raw material by other steel manufacturers.

The company's revenues for the first nine months of this year were $475 million, which resulted in a net income of $2.8 million. The revenues and net income were substantially down from the comparable period of 2011, reflecting the overall softness of the Chinese economy earlier this year. The company's financial results for 2012 are not yet out.

While perhaps a speculative conclusion, as China's economy continues to grow, it's also possible that China Industrial Steel returns to, or exceeds its 2011 levels of revenues of $823 million and net income of $45.8 million.

China Industrial Steel is definitely a smaller capitalization company, with a stock market capitalization of $45.64 million. The company has a current P/E of 3.78.

With the trading activity of the company's shares being minimal, it's obviously not on the radar screen of most investors, but this will likely change. China Industrial Steel is worthy of investor consideration as a way to participate in China's economic growth, and the company is an interesting Chinese basic industry opportunity.

China Gerui Advanced Materials Group (CHOP)

China Gerui Advanced Materials Group is a China based, value-added, steel processor. The Company produces specialized cold-rolled steel products, which are not standardized, commodity items. Instead, the company manufactures specialized products based on specific customer requirements. The company's customers include companies involved in food and industrial packaging, construction and household materials, electrical appliances, and wire manufacturers for the telecommunications industry.

The company's full year, 2012 financial results are not yet out, and it will be interesting to see if there is a positive trend in revenues and net income. For the third quarter, ended September 30, 2012, the company's financial results were a bit disappointing. The company's revenues decreased 44.5% to $56.1 million, from $101.1 million for the same quarter of last year. The decrease in revenues was primarily due to two factors, a decrease in the average selling price per ton, as well as a 17.3% decrease in the tonnage of steel sold.

China Gerui Advanced Materials' net income was $2.4 million for the third quarter, or $0.04 per fully diluted share, compared to $21.4 million, or $0.37 per share for the same quarter of last year.

The company's stock market capitalization is $144 million. The company has a current P/E of 3.28.

Despite the significant decline in the quarter's revenues, the company was able to maintain profitability in the third quarter, which to me is significant. The company's manufacture of specialized products is a significant capability, and one that provides the company with the potential for higher margins than are typically usual for most steelmakers.

I've discussed the company here at Seeking Alpha, and I believe that the company is well positioned to grow as the Chinese economy grows.

An update on Europe's Steel Industry, ArcelorMittal and Nucor

I've written that the global steel industry is increasingly about two countries, the United States and China. I've also discussed the dire prospects for steelmakers with European operations. Wolfgang Eder, the chief executive of the Austrian specialty steelmaker, Voestalpine (OTCPK:VLPNY), and the president of the European Steel Association, was recently quoted as saying,

"Europe's steel mills face obsolescence and steelmakers may quit the region if politicians continue to prevent restructuring and capacity cuts in the sector."

Mr. Eder also indicated that overcapacity continues to plague Europe's steel industry. He stated that Europe has a crude steel capacity approximating 210 million metric tons, resulting in an annual European overcapacity of 40 to 50 Million tons annually. Given Europe's continuing economic problems, it's unlikely that European steel demand will increase this year.

I have recently commented about the problems that ArcelorMittal has faced in France and is facing in Belgium in trying to close steel mills, shudder operations and reduce its number of employees. These attempted actions have caused a pushback by governments, unions and workers. The company's European operations are causing a cash hemorrhage for ArcelorMittal, with no end in sight.

Signifying the significant drag on the entire company that its European operations are having, ArcelorMittal indicated that it took a write-down of $4.2 billion during the fourth quarter of 2012 for its European operations. ArcelorMittal is also facing other problems. These include the need to substantially reduce its debt as well as its need to regain its investment grade credit status. As of December 31st, the company's debt was $21.8 billion. For 2012 the company had a loss of $3.7 billion. I don't see how ArcelorMittal is worthy of investor consideration, until such time as it is able to regain its investment grade status and solve its European problems.

For investors interested in a steelmaker with U.S. operations, Nucor Corp. is worthy of investor consideration. I believe that its profitability and niche in America's steel industry are both significant for investors. I believe that the company is aggressively and fully valued, especially with its current P/E of over 30. If the company's revenues and income increase, and if its share price decreases, the company could be worthy of investment consideration. The company's net income for 2012 was $504.6 million, or $1.58 per share. This compares with net income of $778.2 million, or $2.45 per share for 2011. Nucor reported net income of $136.9 million, or $0.43 per share, for the fourth quarter of 2012.


I don't view steelmakers with global, European or even U.S. operations as attractive for investment. One exception is Nucor, due to the company's profitability. But I'm concerned about the company's very high P/E.

Chinese steelmakers remain attractive to me, as steel is a basic building block that will continue to benefit as the country's economic growth improves. Many, Chinese steelmakers have been able to maintain profitability for 2012, despite the first six to nine months of the year having been a very difficult time for the Chinese steel industry. Since Beijing announced its infrastructure economic stimulus of $150 billion in September, conditions have greatly improved for the Chinese economy, as well as the country's steel industry. Most importantly, as the country's economy increases its rate of growth, the steel industry will be a direct beneficiary.

Three Chinese steelmakers that I've discusse that I believe are worthy of investor consideration are China Industrial Steel, Sutor Technology Group Limited (SUTR), and China Gerui Advanced Materials Group (CHOP).


Investors should carefully evaluate the risk of investing in ArcelorMittal, since the company has lost its investment grade status and it is not likely to regain profitability any time soon. Investors should also carefully evaluate the risks of investing in U.S. Steel , also due to its lack of profitability.

The companies discussed above include smaller capitalization steelmakers with Chinese operations. But the Chinese companies, whose shares trade in the U.S. are all U.S. reporting issuers, and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors. Investing in smaller-capitalization companies, as well as investing in companies in emerging markets, including China, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risk

Disclosure: I am long OTCPK:CDNN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.