US steel stocks are a good opportunity for a long term investment. The Federal Reserve’s third quantitative easing program could benefit steel producers as demand recovers specially in the construction and automotive markets. But this could take some time.
US steel production fell 8.3% to 6.7 million metric tons in February from January 2013. Investors should follow China’s events closely as the country has a 50% share of the world’s steel production and exports its excess supply to countries such as the United States which represents only 5% of world production.
Let’s take a look at three companies from the steel sector that could benefit from the current situation:
The largest steel company is suffering from its Europe’s operations. It has posted a net loss of $3.7 billion for 2012 as demand in Europe declined 8.8% in 2012. Its steel shipments fell 2.3% year over year. ArcelorMittal (ADR) (NYSE:MT) has a lot of exposure to Europe’s economic woes as most of its blast furnaces are located there although the company has been closing some of them (for example in France). If the situation does not improve in that continent investors could see another quarter loss.
On the positive side, the company has decreased its net debt $1.4 billion during the fourth quarter and management is expecting that steel demand could grow between 2 and 3% in 2013. It will try to shift some of its production capacity to other regions including the US as it has submitted a $1.5 billion bid for ThyssenKrupp’s Alabama plant. The company seems to be cutting costs in different ways as it has cut its dividend to $0.20/share for 2013 compared to a $0.75/share paid in 2012 and will also reduce its capital expenditure for 2013 to $3.5 billion from a previous year $4.7 billion.
United States Steel Corporation (NYSE:X): Recovery On Track
United States Steel Corporation (NYSE:X) is the largest producer by volume in the United States. Its latest results have also been hurt by global economic uncertainty as it posted a net loss of $124 million for 2012 or x2.3 times the net loss posted in 2011. Other concern is shown by its ~7% decline in sales for 2012 to $4.49 billion. The company is also exposed to the European markets specifically with its plant located in Slovakia. The company is expecting the tubular segment to rebound this year as the fourth quarter it posted a meager $32 million profit.
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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