Jeffrey Friedland

Jeffrey Friedland
Contributor since: 2012
Company: Friedland Equity Research
To CMComas
We WERE the financial advisor, but that relationship ended in approximately January of 2011, over two and a half years ago. We have had no relationship with the company since that time, and have received no compensation from the company since prior to that time.
My disclosures at Seeking Alpha were correct. We weren't paid, but are shareholders.
What I think is dead in the water is MT, with X being a close second.
I agree with you on that. I do think that there is a good profitability that U.S. Steel will have a good profit for the first quarter.
I did previously indicate in an article here at Seeking Alpha the following:
"When one takes a look at the full year results for U.S. Steel for 2012, it's not a pretty picture. The company's 2012 income from operations was $855 million. The company's loss for the year was $124 million, which included a loss of $353 million attributable primarily to the sale of its Serbian operations.
Because U.S. Steel's full year results for 2012 were impacted by the sale of its Serbian operations, a better indicator for the company's current operations would be to review the company's fourth-quarter 2012 results. But, for the fourth quarter of last year, U.S. Steel Corp. reported a loss of $50 million, or $.35 per share, compared to a net income of $44 million or $.28 per share for the third quarter of 2012.
On the positive side, U.S. Steel's fourth quarter 2012 results were significantly better than those for the fourth quarter of 2011. For the fourth quarter of 2012 the company's losses were $211 million or $1.46 per share."
As I indicated in the first paragraph of today's article, we'll have the first quarter numbers the end of this month. If U.S. Steel is profitable, which, I indicated I hoped would be the case, you then still have for me the valuation issue. Then, as a profitable steelmaker investors will need to come to their own
as to whether the company as a hopefully profitable global steelmaker is undervalued or overvalued. We can revisit this in a few weeks, as I think then, the discussion should also about the likelihood of continuing profitability, if the company was profitable in the first quarter.
Please take a look at my articles on ArcelorMittal (MT). If you're bullish on that company, I would be surprised. I have highlighted in detail the problems with global steel producers, including the European problems, over supply issues, and that I see the bright spots in the global steel market being to some extent the United States and definitely China.
My conclusion is that compared to most global steel makers, that U.S. steelmakers are "OK," but with China's steel market being about 46% (I believe) of global production and with China's economic growth, I'm definitely more bullish on the prospects for China's steel industry.
Unfortunately, the Chinese steelmakers that trade in the U.S., and that have "US type transparency," and file with the SEC are smaller capitalization companies, especially when one compares them to ArcelorMittal, Nucor, or U.S. Steel.
But, if you buy my underlying premise that China is the engine that will drive global economic growth for probably at least the rest of the decade, then steel, as a major component to industrial development and manufacturing will be a beneficiary.
In China's case, assuming that the economy grows in the 8% to 9% rate, it's likely that the demand for steel will grow that amount, and that the oversupply of steel will disappear, sort of like the U.S. current housing economy using up the existing stock of houses.
So, yes, I see minimal upside with so-called global steelmakers. I've outlined some of the reasons in my articles. But I think that the U.S. is OK for steelmakers, until you look at what is happening and likely to happen in China, and how bullish that is for the steel industry.
If you also read the Wall Street Journal article, that was either published a day or two ago about the possibility of a new steel mill in Arkansas, it also highlights some of the issues that the steel industry faces in the U.S., issues that I've also discussed over the past months here at Seeking Alpha.
I'm more concerned about everything about MT being out of control. The company's history consisted of acquiring steelmakers worldwide, many of which were problematic, using debt. Now, not only does the company have a very high debt level, but its debt got downgraded.
Additionally, the real problems the company has and is having in trying to reduce its European capacity, dealing with the politics in Europe, is like a noose around the company's neck.
It just seems to me that everywhere you look at MT there is a problem.
I'm not going to look at being bullish on MT until some of these issues get resolved, and I'm not sure that its current management team is the team to do it.
Tangible assets are important. But, if tangible assets relate to steelmaking facilities that should be closed, then how tangible are they?
With an objective of keeping social unrest in check, the Chinese government is letting wages rise. Over the past year or two wage increases by some factories have seen increases of 15%+. With a tight labor market in many areas, this has forced even smaller producers to raise their wages.
There is a huge disparity of wealth and income in China, and continued wage growth, even at the risk of high inflation, I think will be the norm for the next few years.
But, while increases prices for exports, and ultimately prices for consumers in the US, this will also likely continue to stimulate the local, Chinese, consumer economy.
Sorry. Inflation in China, driven primarily by wage growth will make goods in the US more expensive for Americans. This will affect shopping by Americans at Walmart, and purchases of electronics, mobile phones, etc.
Ben: It's incredibly likely that China will be the engine that propels global economic growth.
And, China wins hands on due to the likely continued increase in GDP over the coming years.
We'll have to see how Japan fares with its new chief of its monetary authority. But, the country, with an aging and stagnant economy has a long way to go.
Dancing Diva: Since you're "bullish on the long term economy," you have to be bullish on China, which will likely be the engine that drives global economic growth.
So, take a look at China's steel producers, including those that I've written about here at Seeking Alpha over the past months.
Yes, CHOP has a value added, higher margin product, a smart strategy.
But, don't right off other steelmakers in China. There will be likely more consolidation in China, and smaller efficient operators have the potential to be the winners, including China Industrial Steel (CDNN), in which I own shares.
I don't follow the company, but it would be interesting to look at their business, and look at their revenue trends in light of North American reduced manufacturing (other than, for the most part the auto industry), and their profitability or lack of profitability and outlook.
I'd rather own a Chinese steelmaker. China, which produces around 46% of the world's steel, has an economy that is growing at 8% or so a year. Compare that factor alone to economic growth in the US or for that matter Canada.
Sam: I agree with you regarding inflation in China. It is a big problem, and I'm not based in Shanghai as you are, but as I see it, I believe that the Chinese government knowingly is encouraging growth in wages as a way of diminishing social unrest and maintaining social stability, which is of primary concern to Beijing.
So, I see inflation continuing in China, and my concern is related to China's export driven industries. Ultimately inflation in China will make goods cheaper to Americans and Europeans, the two most important markets. So far I haven't seen inflation being impacted by these factors in the US, and I'm not at all sure why.
I think to some extent, China manufacturers/exporters are absorbing some or all of the increased costs, as a way to keep their factories busy, with the result that their gross margins will continue to decrease.
Also, as I see it, the increase in wages in China, is part of a strategy to deal with the disparity of income and wealth. I'm also wondering what China's new administration will do further on this, as I see action likely.
Sam: You're right that inflation in China is a challenge, especially with the need to significantly increase the average workers' pay.
But, while you may not think that the Chinese government can control inflation, and you're probably right, to a large extent the level of inflation in China and in other emerging countries is due to the Fed's running the printing presses and the Quantitative Easing programs. A lot has been written about this, and some governments have loudly complained about it.
Sam: You're right that inflation in China is a challenge, especially with the need to significantly increase the average workers' pay.
But, while you may not think that the Chinese government can control inflation, and you're probably right, to a large extent the level of inflation in China and in other emerging countries is due to the Fed's running the printing presses and the Quantitative Easing programs. A lot has been written about this, and some governments have loudly complained about it.
You're absolutely correct. Forward PEs are, I believe somewhat silly to look at.
Regarding debt levels, I've written about ArcelorMittal's (MT) debt here at Seeking Alpha, and I think their debt at the end of 2012 was around $28 billion. The had been downgraded and were no longer investment grade. So, they're trying to reduce the level of debt quickly, which I've also discussed here at Seeking Alpha.
Jack: While many are concerned that China's economic growth has slowed and is no longer in the double digits, Japan, the US and Europe would be ecstatic to have growth in the 8% range!
So, your conclusion is, I believe the same as mine. Where you want to own steelmakers is in an economy that is growing.
Salman: I'm generally bullish on the steel industry worldwide as it relates to any economic growth anywhere. The story of the steel industry in China is one about growth.
While overcapacity is an issue, which no doubt is impacting operating results of many Chinese companies, I think it's unlikely that the government will successfully have much impact on reducing production capacity. But, as was the case in I believe August or September of 2011, when they idled inefficient steelmakers, I do believe that smaller producers with inefficient operations or that cause environmental pollution will be closed. I don't believe that any of the three Chinese producers will likely be affected.
And, I also believe that there will be some consolidation of the industry in China, which I think could also benefit potentially the companies I mentioned, if they're at all interested in being an acquirer.
Understood, but I'm not sure that annual steel production per capita is at all a relevance metric giving the issues with Japan's economy.
If you want to look at it from an investor perspective, look at China's versus Japan's GDP growth, and the potential for growth based on comparing per capital steel production on a per capita basis, comparing China with Japan. But, again I'm not sure that this is at all a relevant metric.
Thanks for your comments.
I meant "rereading the transcript of the earnings call."
I do understand work safety issues and am very familiar with production environments, both in the US as well as in emerging markets, where work safety is a real issue, and one Chinese company where two deaths occurred.
After rereading the earnings release, I checked online to make sure that there were not any recent major work safety issues with US Steel, and couldn't find any.
So, from my perspective, it should be a given that a company such as US Steel has in place appropriate procedures relating to work safety, so therefore it should be taken for granted by investors. Therefore I still maintain that it had no place in the earnings call.
hsellers: My experience is that there are always delays in a new production facility coming on line.
So, my guess is that they achieve 25% to 50% of full capacity, once it comes online, which will probably be late third quarter or full quarter 2913.
Then, I'm guessing that the facility will be fully operational starting the first quarter 2014.
Jeffrey Friedland
I don't know if the Mittal family's intent to buy is a "vote of confidence" or something that they were forced to do if they were going to have any chance of getting the financing done.
I want to see the full year financial results. I want to also see what happens with the Belgium operations, because Europe is a huge cash hemorrhage for the company.
I just think that the company has a number of tough battles in front of them, including trying to regain their investment grade status for their debt and dealing with industry overcapacity in production in Europe. I think that European operations will continue to be a major drag on the company, and distraction.
I also think that the need to regain investment grade status will likely result in selling some of its key production assets, not just mines, that it won't want to sell.
It will be interesting to see their financials for 2012, which should be out in the next 40 days or so.
I don't know if the ore producers are going to be able to continue to have as much control as they have had in the past. Many of them have their own problems. I know some pushed to spot pricing from selling ore on a future contract basis. This might have benefited them when the market was tight, but may not when it's more of a purchasers market.
The China steel market will, it appears, have a good year. I do think that there will be some consolidation in China's steel industry this year.
But, I think it's going to be a tough year for much of the rest of the steel industry, including US steelmakers. It is interesting to me that US steelmakers can seek to raise prices when business is soft though.
Anyway, thanks for your comments.
I don't know if the ore producers are going to be able to continue to have as much control as they have had in the past. Many of them have their own problems. I know some pushed to spot pricing from selling ore on a future contract basis. This might have benefited them when the market was tight, but may not when it's more of a purchasers market.
The China steel market will, it appears, have a good year. I do think that there will be some consolidation in China's steel industry this year.
But, I think it's going to be a tough year for much of the rest of the steel industry, including US steelmakers. It is interesting to me that US steelmakers can seek to raise prices when business is soft though.
Anyway, thanks for your comments.
I think that you made a good decision. Keep an eye on the company's implementation of its China strategy.
Yes, CHOP is a company with, I believe a very good market niche. They're an added value supplier, which I believe is that it gives them a strategy to have greater margins on their products.
China Industrial Steel does have a U.S. auditor, New York based Friedman LLP, http://bit.ly/ToThzO. Check the auditor out.
Thanks for your comment. There is unprofitable overcapacity in steel production worldwide, but the real potential in the steel industry, which I see as a basic building block of industrial production and economic growth in growing economies is steel.
A major focus for me is steel, but the steel industry in 2013 is all about two countries, the US and China. I'm continuing to take a look at China's steel producers.
Jeff
I've been taking a serious look at steelmakers worldwide, what is, in many markets oversupply issues, plus political considerations due to jobs issues in closing mills.
From my perspective, while the CEO is a great dealmaker in putting together this company, I'm not sure how good he is at running it in a difficult business environment.
And, I think that the company has so many issues, I don't see, regardless of book value, investors would find this company attractive.
I've been looking at Chinese steelmakers, with China having a growing economy, accounting for around half of global steel production, with many of the Chinese steelmakers trading at PEs of around 4 to 5, actual PEs, I might add, not forward PEs of 15, which is what MT is trading at.
I'll be putting something out on this, hopefully in the next few days.
Jeff
My biggest concern about the company's future has to do with its European operations that it's stuck with. With the flat to negative economic growth in the Euro Zone, coupled with high unemployment, I'm concerned as to what the company's costs will be to maintain their European presence, as I don't see many governments allowing them to close mills and related facilities.