Commercial Metals Company (CMC), United States Steel Corporation (X): Be Careful With China

Concerns regarding China’s slowdown in economic growth are hitting several sectors in the stock market. Coal and steel stocks are the most affected because China is a main importer of both commodities. On July 15, China’s GDP growth was estimated at 7.5%. However, steel production slowed down. This prompts for the evaluation of stocks that have a high exposure to Chinese markets to determine if they can still bring capital appreciation to their investors.

Concerns about steel demand

The company may have issues returning to profitability in the near future. China is the main importer of steel in the world. However, it is also a large producer of steel. The problem that United States Steel Corporation (NYSE:X) faces is that the supply of steel is still high since China recently reported a surplus of the commodity.

On top of that, EPS estimates have been revised down by analysts from a profit of $1.56 per share, to a loss of $0.57 per share. Earnings for 2014 were also revised down from $2.63 per share to $1.30 per share.

As long as the demand for steel remains weak, United States Steel Corporation (NYSE:X) will have issues turning back to profitability. Therefore, investors should steer away until economic data points toward higher steel demand.

Commercial Metals Company (NYSE:CMC) issued $300 million of senior notes due in 2023 to redeem senior notes due in November 2013.

What puzzles me is that the recycling business’ revenues are also declining to $3.2 million, from $3.9 million. The decline was due to the ferrous price decline of 6% to $331 per ton compared to the third quarter of fiscal 2012.

Further, the exposure of Commercial Metals Company (NYSE:CMC) to the Chinese market is negatively affecting the revenues. Since China has a large surplus of steel, Commercial Metals Company (NYSE:CMC) exports to that country are likely to stay down. Therefore, revenues may continue to be low.