The world steel production grew by 13.1% in Oct. 2009 from one year ago. On the surface that sounds great for USA steel companies. Unfortunately all of that growth was outside the USA. The USA steel production actually shrank by 12.4% during that period. Japan’s slipped 12.9%. Steel production grew in China (42.4%), Russia (24.2%), the Ukraine (42.9%), etc. China is the world’s biggest steel producer as it produced 51.7M out of the 103.9M tons of worldwide production in Oct. 2009. The overall USA steel industry has not been growing. The US produced a paltry 5.9M tons -- roughly an order of magnitude less than China in October 2009. China is the clear leader. It is important to keep that in mind when you evaluate USA steel companies.
U.S. Steel (NYSE:X) is by far the worst performing company in its peer group when you graph revenue growth (TTM) vs. EBITDA margin (TTM). It is the worst when you graph Revenue Growth (TTM) vs. Earnings Yield (TTM). Still what is tantalizing to some is its FY2008 earnings of $17.92/share. If X can somehow get those earnings back, the company’s stock would take off. It is not close to those earnings now. It is supposed to lose -$10.35/share in FY2009. When you adjust this for the shares added by the April 2009 stock offering (considerable), the number is actually considerably higher. In fact some of the apparent improvement in the Q3 results was simply a dilution of the losses due to the added shares.
Is U.S. Steel going back to its former glory soon? I don’t think so. China has accounted for 86% of the overall demand growth since 2006. Very few other places have increased demand noticeably. China is itself servicing this demand. In fact it is even exporting more. Its exports have doubled in the last 6 months. This is not a market that U.S. Steel (X) seems likely to gain traction in soon, and that’s neglecting China's lower price structure.
However, second hand information is never as good as that from the horse’s mouth. The Q3 conference call (see transcript here) covered many pertinent areas. Below are some quotes from the conference call:
John Surma (Chairman and CEO):
Recently, order rates in our Flat-rolled and European segments have decreased and demand trends remain uncertain as both the U.S. and global economies struggle to recover. We're also entering a seasonally slower period. We anticipate that we'll continue to face challenging conditions until a recovery becomes more apparent and more sustained and that there will likely be ups and downs along the way.
Gretchen Haggerty (EVP and CFO):
We continued to reduce inventories in the third quarter with benefits from working capital reductions totaling $1.3 billion for the year-to-date.
In other words, U.S. Steel (X) has saved costs by selling off inventories without replacing them to the tune of a $1.3B benefit to earnings. Yet the earnings are still terrible for FY2009. Almost all of the inventory that can be burned off has been by now. If things do pick up, it will cost U.S. Steel money to grow inventory back.
We remain cautious in our outlook for end user demand as customer order rates in our Flat-rolled and European segments have decreased from the third quarter, partly due to seasonal slowdowns.
Some significant efforts to reduce cost might be a little bit masked by the increase in the pension cost that we have this year.
In other words, even though they have benefited from cost cutting in some areas, other areas continue to increase in cost -- seemingly without control.
John Surma:
There were a number of price increases that were sought, including by us. We did reasonably well on that through October and some additional price increases have not been as successful, and it would appear at this point that spot market prices are leveling and perhaps retracing a bit.
In other words, steel prices are not going straight up as some articles recently have seemed to imply.
I think right now if you just look at what the end use dealer inventories are, you often see those as well as we can, they're still quite low. And they are working those inventories back up to have sufficient number of vehicles on launched to be able to sell from. That probably moves us through the end of the year or close to it. How well that supply chain is maintained and the order rate is maintained really depends on how well they sell. So, I think if you see decent auto sales figures, then we probably have some chance of having a pretty good run with auto. If you see the sales figures starting to slow down, if it goes the way, then we probably have a bit of a slowdown coming.
In other words, the blip up in steel demand in the US was due to Cash For Clunkers. It remains to be seen whether the US auto industry will do well next year. Sales were roughly flat y-o-y for Ford (F), GM, and TM in November. They slipped demonstrably for Chrysler.
Analyst:
European operations. Can you quantify what, if any, impact you're seeing of export flow coming out of Russia or China into pricing or supply/demand characteristics there?
John Surma:
When there is a large flow of exports from China, which we're very much concerned about, we tend to see it first in Southern Europe, that's where it tends to hit in the markets we care about first. And there is some very early anecdotal evidence that that may be a concern, but nothing has really hit heavy so far. That's probably a little bit of time away yet, if it's going to happen.
In sum U.S. Steel seems to think its market will shrink in Q4 mostly based on seasonal issues. It is worried about China, Russia, and the Ukraine.
Currently the predictions are for U.S. Steel (X) to earn +$.98 per share in FY2010. That leaves it with a forward PE of about 48; and that PE is in the words of the company's own officers very iffy. It could always be much better.
However, it is much more likely to be much worse given current trends (described above). U.S. Steel (X) is over priced. It is losing money heavily. It has rapidly growing competition, which has a lower cost structure. The competition also has generally newer equipment as many more of its factories have been recently built. U.S. Steel is not in a position to take business away from the Chinese, Russians, or Ukrainians. In fact it is the other way around.
On top of U.S. Steel being the weaker competitor, you have the specter of the unwinding of the USD carry trade hanging over U.S. Steel’s head. The Chinese are already growing their exports. U.S. Steel will already have trouble getting former business back. If the USD carry trade unwinds next year, which seems likely, the China asset bubble will pop to a significant degree.
The USD carry trade monies have been going into emerging markets of which China is the biggest player. When it unwinds, people will have to sell their other assets in order to pay back the USD’s, so that they do not lose money. When this happens, commodity prices will fall. Real estate prices will fall in China. Banks will get hurt by the real estate deflation. There will be a credit tightening in China. There will be less building for an extended period. Hence there will be less demand for steel.
Yet China is producing ever more steel. Where will that go? China will only very reluctantly cut production. The obvious answer is that it will flood U.S. Steel’s main markets of Europe and the USA. How will U.S. Steel make a comeback next year against this backdrop?
The European credit problems are beginning to make themselves felt again. First there was the problem in Dubai. Then Greece had its debt rating lowered. Today Spain was put on a negative credit watch. Ireland is in trouble. Ditto Italy, the Baltic States, and Eastern Europe. There is even talk about the UK losing its AAA rating. Japan is having trouble with their credit. Plus the Japanese July-Sept quarter GDP was recently revised from 4.8% annualized to 1.3%. Japan is not far from slipping back into recession.
Since they already expected this coming quarter's results to be much lower, it is likely that it will be a negative growth quarter. The CDSs for Japanese government debt have gone up dramatically recently. If everyone else is having credit problems, the US will have some too. If you can’t get credit, you can’t build. Demand for U.S. Steel’s products will shrink.
The Commercial Real Estate market is in serious trouble. Tyler Durden has been writing about this recently, so I won’t repeat that here. However, if prices in commercial real estate are falling, people will not want to build. If they do not build, they will use less steel. Then U.S. Steel will see less demand.
Finally, the U.S. Steel graph shows that this is a good time to get in on the short side in U.S. Steel (X). The graph is below:
The chart shows that U.S. Steel is at its upper Bollinger Band. A stock will normally reverse at that point. The Williams %R indicator shows that it is over bought on the 30-day chart. It is also substantially above its 20-day and 50-day sma lines. It is far above its 200-day sma line. It is due to come down. The Money Flow into U.S. Steel is in a decreasing trend.
The steel industry has been hyped for the last few weeks or more. Perhaps it deserved some of the hoopla. However, U.S. Steel executives do not even claim themselves that everything is about to explode into greatness again for U.S. Steel. That rumor mongering has been perpetrated by a few manipulative brokerage firms, which are seemingly perpetrating a pump and dump scheme. They are pushing the end of the run further up, so they can make more money on the way down. They may also manage to push the price down at the most opportune time for them. The average analyst rating for U.S. Steel (X) is 2.8. If you took out the two highs and the two lows, you would get a SELL. It deserves that rating based on the current performance. Plus the future performance is very uncertain at best. I think I may have even made a case above that the outlook for U.S. Steel is negative for the next year or more.
Disclosure: I am short X. Good luck trading.
