U.S. Steel has shelved plans to construct a 1.6 million ton electric arc furnace at its Fairfield Works facility in Albama, a move that we feel is consistent with the adverse business conditions facing the domestic steel industry.
The company is confident that it can meet the subdued demand for steel with its existing production capacity and will proceed with the construction of the EAF only if market conditions improve. U.S. Steel’s domestic steel shipments have fallen drastically this year as the domestic steel industry battles competition from steel imports and low demand for tubular steels as a result of weak oil prices.
Adverse Business Conditions
The company’s U.S. Flat-rolled steel division, which accounts for roughly two-thirds of its revenues, reported a 27% year-over-year decline in shipments in the first nine months of the year. The decline in the division’s shipments has largely been due to competition from cheap steel imports. Steel sheet imports accounted for 22% of the domestic steel sheet market in 2014, up from 15% in 2013. This figure is expected to rise further in 2015. The domestic steel industry contends that these steel imports, which mainly originate from China, are priced unfairly low and steelmakers have filed petitions with U.S. trade authorities for the imposition of anti-dumping duties on them. The final rulings of U.S. authorities is expected in 2016.
In addition to the woes of the flat-rolled steel division, the U.S. Tubular Products division reported a 64% year-over-year decline in shipments in the first nine months of the year. The tubular products division produces Oil Country Tubular Goods (OCTGs), which are steels that are primarily used in oil drilling. With oil prices having plunged sharply over the previous twelve months (as indicated by the chart shown below), drilling activity in the U.S. has been reduced considerably. The U.S. rig count stood at 709 on December 18, around 62% lower on a year-over-year basis. The reduction in drilling activity has resulted in a decline in the demand for the Tubular Products segment’s products.
In the present business environment characterized by high levels of steel imports and weak oil prices, demand for U.S. steel’s products will remain subdued. If punitive duties are imposed on steel imports in 2016, the business environment is likely to be more conducive to rising production. Similarly, when oil prices recover adequately, the Tubular Products segment will be able to restore production to previous levels. However, both the imposition of duties on steel imports and the timing of an oil price recovery are uncertain. In the interim, the company would do well to shore up its balance sheet and cash flows, with weak pricing and shipments negatively impacting both. Deferring the capital expenditure that would be incurred in the construction of the EAF would certainly help U.S. Steel preserve its cash flows. It is a move that is the need of the hour, as far as U.S. Steel is concerned, and will help more closely align the company’s business with the current business realities.
Source: http://www.forbes.com/