U.S. Steel's Brutal Downfall Will Continue

Shares of U.S Steel (X) have fallen considerably since I recommended selling the stock just a few months ago. With steel prices still depressed, U.S. Steel has struggled to remain profitable. The company is losing money at a very fast rate and the decline in stock price isn’t really surprising.

Perplexing Business Conditions

2015 was a very bad year for U.S. Steel as it lost a lot of money and in its most recent quarter, the company reported earnings per share of -$0.23, well ahead of the analysts’ estimate of -$0.83, whereas revenue for the quarter came in at $2.57 billion, $0.05 billion more than the analysts’ estimate of $2.52 billion.

U.S. Steel’s operations, like its rivals, have been adversely obstructed by a rise in U.S. steel imports.
A severe rise in Chinese steel exports along with strong U.S. Dollar were the chief reasons for the rush in steel imports.

With the escalating Chinese steel exports, the domestic need for steel in China has faded. As a consequence of decelerating economic growth, steel demand in China is projected to shrink further this year, following on from two successive years of weakening demand. In spite of the faintness in domestic demand, steel manufacturing levels have endured to persist equitably high, occasioning in an oversupply condition.

These imported steels are valued expressively lower than the domestic steels, with local manufacturers demanding the hassle of disciplinary tariffs on steel imports from various countries comprising China, resisting that these imports are valued unfairly low. Furthermore, the solidification of the U.S. Dollar has made these imports low-priced still. Apart from the competition, the faintness in the demand for steel in North America has added to the miseries of domestic steel manufacturers.

The competition from steel imports together with weak demand situations adversely impacted the results of the U.S. Flat Rolled Steel partition, which accounts for the company’s largest partition, generating around two-third part of the company’s overall revenue. Flat Rolled Steel division’s shipments and appreciated prices dropped coarsely 14 percent and 17 percent respectively on a yearly basis in the fourth quarter previous year. Capacity utilization dropped to 57 percent in Q4 versus the 75 percent in the same period of 2014, which clearly shows the weakness in demand.

Going forward, steel demand is expected to remain low, which in turn will have a negative impact on steel price. As a result, I think investors should still avoid U.S. Steel as the stock is far from a bottom.
Published on Feb 11, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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