U.S. and European Steel Cannot Confirm Recovery

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US Steel exports for 2012 climbed 2.2% to a record 13.745 million tons despite a slowdown at the end of the year according to American Institute for International Steel (AIIS). Month-over-month, total steel exports dropped 16% from October to November and then dipped further by 2.9% to 879,053 tons in December.  The slowdown witnessed at the end of 2012 is continuing into 2013 due to soft demand from local and international markets.

This is a bearish leading indicator for the 2nd half of 2013.  The leading US steel producers have reported falling revenues and shipments for the final quarter of the CY-2012 due to falling prices and weak demand.  For 2012, Mexico was the bright spot for the American steel industry in terms of year-over-year growth; increasing by an impressive 20%.

US Steel (NYSE: X) posted improving year-over-year results in which fourth quarter net losses narrowed to $50 million from $211 million in 2011.  Although its net sales dropped by 6.8% from last year to $4.49 billion it topped analysts’ estimates of $4.35 billion. Steel Dynamics (NASDAQ: STLD), however, had a better quarter than that, nearly doubling its net income year over year to $60.57 million in Q4. This translated into an EPS of $0.27 per share, making a near mockery of analysts’ estimates of $0.15 per share. The latest results included a $16 million (or $0.07 per share) boost from positive tax adjustments. The company’s net sales fell 8.1% from $1.86 billion to $1.71 billion and it did so on lower operating margins as shipments declined just 0.6% 1.46 million tons.

By contrast, ArcelorMittal (NYSE: MT), the world’s leading steel producer, which is heavily exposed to the debt ridden continent of Europe, saw its net loss widen from $1 billion in Q4-2011 to $3.99 billion in Q4-2012 on a previously announced goodwill write off of $4.3 billion of its European operations in December.  So, this is a balance sheet, not operational loss.  That’s not to say business in Europe is booming or anything. Steel demand in Europe dropped by 8.8% in 2012 alone taking the total fall from 2007 cumulatively to 29% and ArcelorMittal appears to be bearing the brunt of this drop.  

Its quarterly sales dropped by 14.0% to $19.31 billion due to declining average selling prices and lower volumes. Total steel shipments fell by 2.9% from 2011 to 20.0 million metric tons. However, the company is expecting to improve its annual EBITDA in 2013 from 2012 levels. Its EBITDA for 2012 stood at $7.1 billion; analysts are expecting 14% growth to $8.11 billion in 2013.

ArcelorMittal’s American rival, Nucor (NYSE: NUE), was not immune to the issues in Europe and posted a 7% drop in net sales for its fourth quarter to $4.45 billion while earnings remained flat down just $200,oo to $136.9 million while its EPS remained at $0.43 per share. Like ArcelorMittal, Nucor’s revenues were also hit by declining prices; the company’s average selling price per ton fell by 4% year-over-year. Quarterly production and shipments fell by 1% and 3% to 4.73 million tons and 4.76 million tons, respectively. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>MT</p> </td> <td> <p>NUE</p> </td> <td> <p>X</p> </td> <td> <p>STLD</p> </td> </tr> <tr> <td> <p>Market Cap</p> </td> <td> <p>23.6B</p> </td> <td> <p>14.4B</p> </td> <td> <p>3.1B</p> </td> <td> <p>3.3B</p> </td> </tr> <tr> <td> <p>Enterprise Value</p> </td> <td> <p>45.5B</p> </td> <td> <p>16.9B</p> </td> <td> <p>6.4B</p> </td> <td> <p>5.1B</p> </td> </tr> <tr> <td> <p>Stock 6M</p> </td> <td> <p><strong>0.00%</strong></p> </td> <td> <p><strong>+16.7%</strong></p> </td> <td> <p><strong>+2.5%</strong></p> </td> <td> <p><strong>+22.2%</strong></p> </td> </tr> <tr> <td> <p>Stock 1Y</p> </td> <td> <p><strong>-28.7%</strong></p> </td> <td> <p><strong>+3.0%</strong></p> </td> <td> <p><strong>-24.2%</strong></p> </td> <td> <p><strong>+2.6%</strong></p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>N/A</p> </td> <td> <p>28.6</p> </td> <td> <p>N/A</p> </td> <td> <p>20.8</p> </td> </tr> <tr> <td> <p>EPS</p> </td> <td> <p>-2.42</p> </td> <td> <p>1.58</p> </td> <td> <p>-0.86</p> </td> <td> <p>0.73</p> </td> </tr> <tr> <td> <p>Yield</p> </td> <td> <p>4.2%</p> </td> <td> <p>3.3%</p> </td> <td> <p>0.9%</p> </td> <td> <p>2.6%</p> </td> </tr> <tr> <td> <p>ROA</p> </td> <td> <p>1.8%</p> </td> <td> <p>4.6%</p> </td> <td> <p>1.6%</p> </td> <td> <p>4.2%</p> </td> </tr> <tr> <td> <p>ROE</p> </td> <td> <p>-6.6%</p> </td> <td> <p>7.6%</p> </td> <td> <p>-3.6%</p> </td> <td> <p>5.9%</p> </td> </tr> </tbody> </table>

However, the future of steel industry is still marred by uncertainty. The US steel industry is suffering from overcapacity and softening economic indicators as we go deeper into Q1 only further support this idea.  Iron ore prices in China have recovered nicely off of their September lows but capacity utilization in the U.S. is running around 75% down from 79% a year ago according to Platt’s.   Production so far from weekly estimates is also off 7% so far.  The American Iron and Steel Institute estimates that the U.S steel consumption rose by 7.8% in 2012 but imports of finished steel during the same period surged by 18% which indicates a rising share of foreign players, particularly China, in the American steel market.  

With the Fed trying to induce inflation and the equity markets beginning to look heavy as they approach significant resistance levels around the world, commodity prices are beginning to soften as well.  U.S. copper and natural gas prices are falling back from important levels as have oil prices.  Steel producers in the U.S. and Europe will show cyclical strength and weakness until a real recovery takes hold in those economies.  I would avoid them as anything other than trading vehicles based on a 6 month lag in oil prices.

PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Nucor. The Motley Fool owns shares of ArcelorMittal. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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