The Prospects For U.S. Steel And Chinese Steelmakers

Includes: CDNN, X
by: Jeffrey Friedland

Tuesday's announcement that United States Steel Corp. (NYSE:X) was going to have its first quarter 2013 conference call on April 30th motivated me to take another look at the company. I noticed that the announcement stated that it was a conference call and not an earnings call, so I'm not expecting an announcement of profitability for the quarter, but I would be delighted to be surprised. I've written extensively here at Seeking Alpha about U.S. Steel, including a recent article about the company's corporate culture.

Steel production is a basic building block of a country's economic growth. I decided that with segments of the U.S. economy showing improvement, including the housing market, to take a look at whether U.S. Steel's fourth quarter revenues appeared in any way to correlate to U.S. GDP growth. I then decided to do the same thing with a Chinese steelmaker, China Industrial Steel (OTCPK:CDNN), and try to correlate that company with China's economic growth.

A Look at U.S. GDP Growth in the 3rd and 4th Quarters of 2012 and U.S. Steel

The U.S. economy grew 3.1 percent in the third quarter, and .4 percent in the fourth quarter of 2012. The U.S. finished 2012 with a growth rate of 2.2 percent for the year.

U.S. Steel's revenues for the fourth quarter of 2012 were $4,487 million, compared to $4,652 million for the third quarter, a decrease of 3.5 percent.

U.S. Steel lost $50 million in the fourth quarter and $44 million in the third quarter of 2012. The company's full year 2012 losses were $124 million, corresponding to $.86 per share.

The company's shares closed today at $17.44. The company's shares are trading at the low side of its 52 week range of $16.87 to $30.29.

I'm ignoring today's stock market sell-off for now, but with the U.S. market having recently reached new highs, U.S. Steel hasn't been a beneficiary of the current bull market.

U.S. Steel doesn't have a P/E due to its lack of profitability, but its forward P/E for the year ending December 2014 is 7.86. I tend to focus on numbers, and instead of looking at forward-looking P/Es, I'd much rather look at actual P/Es, based on actual earnings.

As I've indicated here at Seeking Alpha, I'm troubled as to how U.S. Steel can justify paying a dividend when profitability is so elusive. I guess I'm a bit old fashioned, but I believe that dividends should be paid only when there are actual profits. On January 29th, U.S. Steel declared a dividend of $.05 per share. The company indicated that it had a strong liquidity position, which as of the end of 2012 consisted of $570 million in cash, so it did have the cash to pay the dividend.

Despite the growth of the U.S. economy in the third and fourth quarters, there was not a direct correlation of America's GDP growth to U.S. Steel's revenues. Because of how significant steel is to manufacturing and construction, this leads me to the conclusion that U.S. growth in the quarters was not being led by either of these two sectors, despite robust U.S. auto manufacturing.

A Look at China's GDP Growth in the 3rd and 4th Quarter of 2012 and China Industrial Steel

China's economy grew 7.4 percent in the third quarter, and 7.9 percent in the fourth quarter of 2012. China finished 2012 with GDP growth of 7.8 percent for the year.

China Industrial Steel's revenues for the fourth quarter of 2012 were $157 million, compared to $170 million for the third quarter, a decrease of 7.6 percent. The company's full-year 2012 revenues were $649 million.

China Industrial Steel generated a profit of $3.129 million for the fourth quarter. The company's full year income for 2012 was $5.935 million, corresponding to $.08 per share. Over half of the profits were earned in the fourth quarter.

As was the case with U.S. Steel and my seeking to find a correlation with America's economic growth, there also wasn't a correlation between China's economic growth and China Industrial Steel's revenues.

China Industrial's Steel's shares closed today at $.52, and the company's P/E is 3.17.

Growing Economies are Beneficial for a Country's Steelmakers

The U.S. economy is anticipated to grow at a rate of 2.4 percent this year, although some economists are projecting GDP growth closer to 3 percent. Bill Gross, the founder and co-chief investment officer of PIMCO, indicated today that he expects the U.S. economy to grow at 3 percent this year. I'm not as optimistic as Bill Gross, but instead am projecting that the U.S. economy will grow at a rate of between 2.5 and 3 percent this year.

My conclusion is that it's unlikely that any steelmaker with major U.S. operations can grow at a rate greater than the growth rate of the U.S. economy. This includes not only U.S. Steel, but also other companies that I've written about here on Seeking Alpha, including Nucor Corp. (NYSE:NUE), ArcelorMittal (NYSE:MT) and AK Steel Holding Corp. (NYSE:AKS).

In contrast to the growth of the U.S. economy, China's economy is projected to grow at a rate of more than 8 percent this year. Preliminary data for the first quarter of this year confirm that the economy is on track to do so. I'm optimistic about China's growth prospects. I wouldn't be surprised if China's economy grew more than 9 percent this year.

I'm bullish on Chinese steelmakers. These include not only China Industrial Steel, but also other steelmakers that I've written about here onSeeking Alpha, including Sutor Technology Group (SUTR), and the value-added steel producer, China Gerui Advanced Materials Group (NASDAQ:CHOP). My conclusion is that these steelmakers are likely to grow at a rate equal to or greater than the growth rate of China's overall economy.

Comparing Metrics: U.S. Steel and China Industrial Steel

U.S. Steel doesn't have a current P/E due to its lack of profitability. China Industrial Steel has a low P/E of 3.17. I'd rather own shares of a company that is currently profitable rather than a company, such as U.S. Steel, that perhaps will be profitable in 2014.

U.S. Steel's book value per share is 24.1. China Industrial Steel's book value per is 2.59. Based on this metric alone, if one assumed that U.S. Steel is fairly priced, China Industrial Steel's shares should be trading in the $3.80 range, instead of the current price of $.50.


China Industrial Steel is not on the radar screen of most investors, but this will likely change, especially as more investors compare China Industrial Steel's financial results to global steelmakers.

I also believe that China Industrial Steel is worthy of investor consideration as a way to participate in China's economic growth.


Investing in companies that are not profitable, including U.S. Steel, as well as investing in smaller-capitalization companies, including companies in growing economies such as China, is not suitable for all investors, and can be risky. It's important that investors thoroughly perform their own due diligence and analyze the potential risks.

Companies discussed includes companies with Chinese operations. But, the Chinese companies, whose shares trade in the U.S. are all U.S. reporting issuers and subject to the reporting requirements of the U.S. Securities and Exchange Commission, so U.S. transparency and disclosure is available to investors.

Disclosure: I am long OTCPK:CDNN. 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.

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