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U.S. Steel (NYSE:X) announced its first-quarter results on Tuesday and reported a quarterly loss of $73 million compared with the previous year’s loss of $219 million for the same quarter. Steel shipments and sales declined from last year. Lower average realized prices and a decline in demand due to less oil and gas drilling activity in the quarter were responsible for lower sales.

The demand from the automotive sector is expected to be stable going ahead. The company is focusing on producing value-added products for its customers in this segment, which will help them achieve fuel efficiency in order to meet regulatory requirements. The demand for its products in the tubular segment is expected to remain strong as well given the heavy drilling activity going on as natural gas prices rise in the U.S. However, growth in imports in this segment could spoil the party for U.S. Steel.

Operational Performance

U.S. Steel reported revenues of $4.6 billion this quarter, compared with $5.2 billion in Q1 2012.

  • In the flat-rolled division, the company incurred a loss from operations of $13 million in the first quarter as compared to income of $183 million in Q1 2012. The deterioration in performance came as a result of a decrease in average realized prices, lower steel substrate sales to its Tubular segment, higher natural gas costs, lower income from its joint ventures, increased facility repairs and maintenance and other operating costs, and a decrease in shipment volumes.
  • In the tubular segment, income from operations was $64 million in the first quarter, compared to $129 million last year. The decrease resulted mainly from lower average realized prices and a decline in shipment volumes.
  • In the European division, income from operations for the quarter stood at $38 million, compared to a loss of $34 million last year. The improvement came about primarily due to lower raw materials costs, the elimination of operating losses associated with its former Serbian operations and a decrease in other operating costs. The major raw materials this industry requires are coal and iron ore and prices of both have fallen considerably from last year.
  • Average realized price per tonne of steel declined across all business segments. Average realized price per tonne declined from $764/tonne to $719/tonne in the flat-rolled division, $748/tonne to $718/tonne in the European segment and $1,727/tonne to $1,556 /tonne in the tubular segment. Prices were influenced by decreased drilling activity as well as macroeconomic sentiment as growth in China slowed down. China consumes majority of the world’s steel and hence demand from here has a major impact on worldwide steel prices [U.S. Steel Q1 2013 10-Q, SEC].

Going Forward

U.S. Steel has managed to achieve self-sufficiency in terms of its requirement for coke. Firstly, the company is now producing enough coke from its own facilities at Clairton and Gary Works. Secondly, it has taken advantage of cheap and plentiful natural gas available due to the shale gas abundance by coming up with methods to cost-optimize the blend of coke and natural gas used in its operations [U.S. Steel Q1 2013 Earnings Conference Call, Seeking Alpha].

At its iron ore operations in Minnesota, the company is developing several smaller projects aimed at improving the yield on crude ore mined at the Minntac operations. This will increase the quantity of iron ore available for steel production. Also, U.S. Steel is currently in the process of determining the technical process requirements and the estimated capital investment required to produce Direct Reduced Iron (NYSE:DRI) grade pellets from its iron ore mining operations. DRI is one of the methods of steel production.

Flat-rolled shipments in the first quarter increased slightly from the fourth quarter last year. The demand from the automotive sector was strong and is expected to be so in the next quarter as well. Vehicle inventories are running low right now, which will help boost demand for steel as factories churn out more units. Also, the company is focusing on producing advanced high-strength steels which it says will provide its automotive customers with a cost effective and environmentally sound alternative to other heating materials. For this purpose, it completed the construction of a 500,000 tonnes per year continuous annealing line in the first quarter. However, an overall operating loss is expected next quarter for this segment as U.S. Steel expects higher operating costs on account of higher maintenance and repair costs.

The demand from the construction industry and the pipe and tube industry is also expected to be strong in the U.S. The demand from the appliance, electrical steel and tin plate industries in Europe is expected to decline next quarter. For the tubular steel business, the increase in rig count and rising gas prices are bits of good news, but the increasing quantum of imports continue to pose a challenge to U.S. Steel. In the first quarter, imports constituted around 50% of the total market share in the oil country tubular goods segment and 60% in the line pipe market segment. For the same reason, positive impact from increased drilling in the Gulf of Mexico may be moderate [U.S. Steel Q1 2013 Earnings Presentation, U.S. Steel Website].

The continuing eurozone financial and debt crisis have weighed on the company’s European business results for some time, and additional challenges are expected due to investments that will have to be made to conform to the European Union’s (NYSEARCA:EU) environmental regulations. Assistance from the Slovakian government will help in reducing the monetary impact to a large extent. (U.S. Steel to keep Slovakian plant in return for energy subsidies, Pittsburgh Post-Gazette)

We have a price estimate of $23 for U.S. Steel, which will be revised shortly in light of the recent earnings results.

Disclosure: No positions

Source: U.S. Steel Reports Net Loss On Lower Demand And Prices