United States Steel: Is This Beaten Down Steel Stock A Good Pick?

| About: United States (X)

Summary

United States Steel Corp has tumbled more than 70% in the past year.

Lower average realized price of flat-rolled steel as a result of heavily subsidized imports from China and high amount of inventories has weighed on financials.

Tubular segment has also felt the heat due to lack of drilling activities in the backdrop of low energy prices and cheap imports.

Notwithstanding short-term headwinds, the steel industry could turn positive in the mid-term as expected decline in production could rebalance steel market and push-up prices.

Amid meltdown in metal markets, steel prices have been the hardest hit. The U.S. steel industry, however, has been hit even harder. Prices of benchmark Hot-Rolled Coil steel, which trades around $400/ton, has fallen by more than a third in last one year. As a result, companies such as United States Steel (NYSE:X) have felt the pinch on its financials. It has now recorded 9 quarterly losses in last eleven quarters.

Causes for sharp drop in steel prices

A global supply glut in the steel market, mainly due to years of over production by the China, has been a key factor behind the dramatic drop in prices. To give an idea of China's dominance in the global steel market, in first nine months of 2015, China shipped 71.4 million tons steel-a 31% jump in exports compared to the same period of 2014.

The U.S. steel industry, however, suffered also due to years of dumping of cheap Chinese steel in its market as slowing infrastructure projects in China lowered the demand for raw materials.

A data provided by the American Iron and Steel Institute shows that U.S. steel imports from China, which constituted just 20% of the total domestic steel production in April 2010, climbed to 31% of the total domestic production in April 2015.

Moreover, a sharp drop in oil prices has also halted drilling activities among oil producers, which in turn dented the demand for tubular products, hurting average realized prices.

United States Steel's Freefall

In this backdrop, America's leading steel company, United States Steel had a dreadful run. The stock, trading just above $7, has crashed from its 52-week high of $27.68 amid tumult in the U.S. steel industry and meltdown in the broader metal and mining market. Reporting yet another loss, the management, in its fourth quarter earnings call gave a very cautious outlook for the current year.

Keeping aside the short-term view, the question now is can the steel market after getting walloped in last few years, rebound? Has it bottomed out? Is United States Steel a good bet in the long-term?

Is there any rebound in sight?

Not immediately. The outlook for the steel industry remains downbeat due to huge inventories level even as steel makers in the U.S. grapple with inefficiency as result of plants running way below the production capacity. However, there is one silver lining. Many of the metal markets are currently plagued by demand-supply disequilibrium but stand to gain in the mid-term as miners slash production due to low realized prices. This is also happening in the steel market.

China, which accounts for more than half of the global steel production, has cut its output due to waning demand. According to Financial Times, China's steel production is set to fall by 2.2%, and as a result, its outward shipment will either remain flat or decrease in 2016, following 20% jump in exports, last year. Moreover, according to the report, the U.S. industry is expected to swing into growth of 3% in 2016.

As for United States Steel Corp, its ongoing efforts, the Carnegie Way culture or cost cutting initiative should also yield positive results in the coming quarters. Under its Carnegie Way, the steel producer is trying to achieve sustainable cost improvements and process improvements, which should eventually bolster its bottom line and reward shareholders.

Although the steel industry has been under tremendous pressure with prices sinking to multi-year lows, and no immediate turnaround on the horizon, United States Steel is worth a look, if investors are prepared to have a long-term investment horizon.

Disclosure: I am/we are long X.

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.