ArcelorMittal (ADR) (MT), United States Steel Corporation (X): A Closer Look at the Steel Sector

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Maybe the US drilling boom could help the company increase revenues.

Now let’s see the good news. All of the company’s segments posted profits for 2012 which signals that United States Steel Corporation (NYSE:X) is recovering from the 2010-2011 losses. Its capex remained at stable at $723 million for 2012 and the company estimated $800 million for 2013. Its cash from operations has been increasing at a great pace and helping the company reduce net debt by $450 million in 2012. The company has a healthy balance sheet that can help it to weather the global economic uncertainty as the company expects an increase in shipments for the next quarter.

AK Steel Holding Corporation (NYSE:AKS): Increasing Debt Could Be Problematic

AK Steel Holding Corporation (NYSE:AKS) has the core of its investments in the United States which exhibits a different strategy than ArcelorMittal (ADR) (NYSE:MT) or United States Steel Corporation (NYSE:X) that have both operations in Europe. The company posted a net loss of $1 billion for 2012 repeating another year consecutive loss. Another concern is focused on its sales which also decreased almost 10% from 2011 to approximately $6 billion. As well as the other companies, AK Steel Holding Corporation (NYSE:AKS) blamed the global crisis for the poor performance. It is still having some issues from pension related charges as it posted a pension corridor charge of $157 million for 2012.

Although the company has improved its liquidity by nearly doubling it from the third quarter of 2012, it is facing increasing trouble regarding its indebtedness. In the second part of 2012 Moody’s has downgraded its credit rating to B2 as the company is under a high leverage position and cash flows are under pressure due to the current economic situation. Its debt to EBITDA ratio according to the rating agency is about 13x. The company is expecting better quarter results for 2013 and could cut some costs by reducing key inputs by targeting self sufficiency rates of 90% in coke and 15% in electricity. This could shelve off some costs in the company’s balance sheet.

Final Comment

The global steel sector is facing some strain due to the economic crisis which still does not get to previous levels of steel demand. This has pushed China’s steel surplus to other markets which has generated cuts in the steel producers’ margins.

From this peer group, the company which is better positioned for a possible rebound in steel demand is United States Steel Corporation (NYSE:X). Although it has posted a net loss for the last quarter of 2012, the company has reduced its exposure to the European market and all of its segments have been profitable in 2012. The company could benefit from the US drilling frenzy with a potential improvement in its tubular segment and its healthy financial situation could be a safety net in case of further economic contraction.

The article A Closer Look at the Steel Sector originally appeared on Fool.com is written by Damian Illia.

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