Must-know: An overview of US Steel Corporation (Part 8 of 8)
U.S. Steel Corp. key points
After analyzing the relevant investment rationales related to U.S. Steel Corp., we’ll move on to analyze some factors that can be a value driver for the stock in the future.
- Trade deal with Russia – After the Cold War, the U.S. signed a deal with Russia to stem the steel imports from Russia. According to the agreement, Russian steelmakers are exempt from steep anti-dumping duties on hot rolled coil (or HRC). Instead, it sets a cap on imports and a minimum selling price. Russian imports have been rising and consistently selling at much less than domestic prices. There has been a 1,400% increase in shipments from Russia in the first six months of 2014. The steel producers have approached the U.S. Department of Commerce (or DOC) to canel this agreement. The DOC is supposed to be analyzing the demand of U.S. Steel producers. With the U.S. using economic sanctions on Russia for its misadventure in Ukraine, steel producers like their chances getting support from the government. A favorable decision from the government can be a huge positive for U.S. Steel Corp (X) and other steel makers like ArcelorMittal (MT), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS) along with the SPDR S&P Metals and Mining ETF (XME)
- Shale boom – The growth in the U.S. oil and gas industry along with the shale boom, should have been a godsend opportunity for the domestic steel industry. The previous chart shows the increase in crude production in the U.S. The trend is expected to continue as the nation moves towards energy security. However, cheap imports was the downer and domestic companies have suffered. With an enviable position in Oil Country Tubular Goods (or OCTG) products coupled with the recent anti-dumping duties on such products, U.S. Steel Corp. can capture a greater share of this market. Also, it boostd its profitability, which was impacted by such imports. A positive decision from the International Trade Commission (or ITC), as discussed earlier, can be a key driver for the stock going forward.
- High production costs – U.S. Steel has one of the highest cost structure owing the aging plants. The company is in the process of modernizing some of these plants. It’s also moving to the electric arc furnace (or EAF) process in some of these plants. This process reduces the fixed cost structure of a plant. It also reduces its operating leverage. The reduced cost structure would help the company increase its profitability
- Raw material sufficiency – U.S. Steel Corp. has 900 million tons of recoverable iron ore reserves. It remains largely self-sufficient in its iron ore needs. However, it’s still sourced and most of its energy needs come from outside. Any move to gain self-sufficiency in energy needs will benefit the company in the long term.
Browse this series on Market Realist: