On Aug 28, we issued an updated research report on steel maker U.S. Steel ( X). While the company is well placed to gain from aggressive cost management, healthy automotive demand and increased cokemaking capabilities, it is exposed to weak steel market fundamentals and some near-term operational challenges.
U.S. Steel’s losses narrowed in the second quarter of 2014, reported on Jul 29, on its cost-cutting initiatives and better pricing. Both revenues and adjusted earnings beat Zacks Consensus Estimates.
U.S. Steel is actively engaged in improving its cost structure and increasing revenues on a sustainable basis through its “Carnegie Way” initiative. These efforts are expected to deliver $435 million (up from $290 million expected earlier) in cost and margin improvements in 2014, most of which is expected to be realized in the Flat-rolled segment.
U.S. Steel is also seeing strong demand in the automotive space. Its partnership with specialty alloy maker Carpenter Technology Corporation ( CRS) to develop lighter high-strength steel for automotive applications will usher in incremental opportunity in the automotive market.
Moreover, U.S. Steel is looking for opportunities related to the availability of reasonably priced natural gas as an alternative to coke in the iron reduction process to improve its cost competitiveness while reducing its dependence on coal and coke in the long term. The company is also expanding its coke-making capabilities and has taken a number of steps in order to ensure long-term access to high quality coke for its blast furnaces.
However, oversupply in the steel industry and high domestic imports still remain headwinds, pressurizing prices and prospects of steel producers. U.S. Steel’s Tubular segment remains challenged by weak pricing due to imports.
U.S. Steel is also expected to face some operational challenges including blast furnace outages in the near term. The company’s European division is expected to see weaker results sequentially in the third quarter, partly due to maintenance outage. Moreover, the Tubular segment is expected to see lower volumes due to the idling of two unprofitable manufacturing facilities located in McKeesport and Bellville.
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