I studied industry trends and company fundamentals to see if U.S. Steel (NYSE:X) had a good point of entry for a possible short trade. I believe the current economic climate to be favorable to a short sided trade in U.S Steel that could be handled in a few possible ways. First the facts:
U.S. Steel reacts differently to different boom markets. Consider that the mid-90s prosperity phase was fueled by the tech sector, especially the effect of ever-widening Internet availability. Neither of these sectors were based on substantial steel consumption, a fact reflected by X lagging the S&P 500 in the late 90s. By contrast, the 2003-2008 price increase coincided with the U.S. housing bubble and vast building projects in China. Both of these are very dependent on steel supplies, allowing U.S. Steel to reap great profits. At this point, there is little reason to anticipate a demand for steel that would exceed those phases of growth. On the contrary, large-scale construction and steel demand may sag further into the near future. Consider the following:
1. China's "ghost cities" generated by overzealous construction with little corresponding demand. The over-supply of existing residential and commercial real estate does not bode well for profitable construction ventures until demand fills the existing Chinese real estate glut.
2. On 1/29/13, Bloomberg reported a surprisingly negative quarterly outlook for U.S. Steel. The company cited persistent trouble in staying profitable since the time of the 2008 financial crisis.
3. Steel industry analyst MetalMiner stated that overproduction would put a break on profits until the existing steel glut is absorbed.
Dampened demand for steel in combination of over supply means that a US steel company will likely not compete with Chinese suppliers who do not have the high labor costs, or environmental procedures to contend with. In fact if the majority of the steel demand was in the Asian-Pacific theatre then it could be argued that self sufficient supplies will exist in China. Particularly with large quantities of scrap and recycled steel going to China where it is processed for pennies compared to in the United States.
U.S. Steel Financials
The latest U.S. Steel "Key Statistics" show significant negative percentages on return on equity and quarterly revenue growth. They also show the company maintaining a massive 3.94 billion dollars in debt. A sore eye that could manifest into a swollen head if they are not able to find profitability soon.
Annual financial statements support the argument for taking up a short-sell position on X. In 2010-2012, U.S. Steel has a consistent history of negative income applicable to common shares and a balance sheet history that shows decreasing stockholder equity. The company's cash flow statement is, admittedly, somewhat more encouraging for a long position, with positive cash flow in 2012. However any optimism over that is quickly trumped by the debt burden and what it can mean for the future of equity for common share holders.
Birds of a Feather
Competitor ArcelorMittal (NYSE:MT) and the (NYSEARCA:SLX) ETF that tracks the NYSE Arca Steel Index show very similar price direction behavior for as long as all these securities have existed. This is indicative of an industry wide issue that may not resolve itself any time soon. Similar events triggered by 2008's melt down imploded the dry shipping industry when a combination of over supply of ships and sudden, drastic, decreases in demand hit the markets. It took high flyer DryShips Inc. (NASDAQ:DRYS) and Eagle Bulk Shipping Inc. (NASDAQ:EGLE) to the dumps and put General Maritime (GMRRq), Overseas Shipping Group, Inc. and a handful of others into bankruptcy. This severe lack of use of these ships and the fact that no one is building new dry hall ships both play a role in steel producers on-going problems.