U.S. Steel released its third quarter results on November 3 and conducted a conference call with analysts the next day. As expected, the company’s performance was negatively impacted by challenging business conditions arising as a result of competition from cheap steel imports and weak demand conditions for steel. U.S. Steel reported an adjusted net loss (which excludes the impact of one-time items on earnings) of $103 million in Q3 2015, as compared to a profit of $325 million reported in Q3 2014. The most important takeaway from the earnings conference call was the company’s focus on cost reduction and boosting operational efficiency in the backdrop of challenging business conditions.
Challenging Business Conditions
The fortunes of the U.S. domestic steel industry have been negatively impacted by competition from cheap steel imports. Steel sheet imports have risen sharply, accounting for 22% of the domestic market in 2014, up from 15% of the domestic market in 2013. The market share of imported steels is expected to rise further in 2015, with rising Chinese steel exports and a strong U.S. Dollar the leading reasons for the surge in steel imports.
Domestic demand for steel in China has declined as a result of slowing economic growth. The World Steel Association expects Chinese demand for steel to decline by 0.5% in 2015, following on from a 3.3% contraction in 2014. However, with production levels continuing to remain fairly high, the Chinese steel industry is characterized by an oversupply situation. As a result, Chinese steel exports have risen sharply, standing at 83.1 million tons in the first nine months of the year, roughly 27% higher year-over-year. These imported steels are priced lower than domestic steels, with domestic producers contending that they are priced unfairly low and demanding the imposition of punitive import duties on these imports. In addition, the strengthening of the Dollar has made them even cheaper in Dollar terms. In addition to competition from steel imports, prevailing demand conditions for steel in North America are fairly subdued. As per World Steel Association estimates, steel demand in North America is expected to decline by 0.9% for the full year 2015.
A combination of weak demand and competition from steel imports negatively impacted the results of the U.S. Flat-Rolled Steel division, U.S. Steel’s largest division, which accounts for around two-thirds of the company’s revenues. Excluding the results of U.S. Steel Canada, which filed for bankruptcy last year, the division’s shipments declined roughly 17% year-over-year to 2.68 million tons in Q3 2015. Capacity utilization declined to 66% in Q3 2015, as compared to 85% in the corresponding period of last year, indicative of the subdued demand conditions. Lastly, the division’s realized price declined 14% year-over-year to $674 per ton in Q3 2015, with competition from imports and weak demand taking their toll on pricing.
Competition from steel imports also negatively impacted Euro-based price realizations for U.S. Steel’s European operations, which declined 8% year-over-year to Euro 464 per ton. In Dollar terms, prices declined 23% year-over-year. However, improved demand conditions for steel vis-a-vis last year drove a 2% increase in production.
Source: http://www.forbes.com/