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United States Steel Corporation (X): This Steel Giant Is Expecting an Improved Business Environment

The world’s leading steel producer, ArcelorMittal (ADR) (NYSE:MT), recently released its quarterly results that disappointed investors, but the sequential improvements led to some optimism. Meanwhile, its American rival, United States Steel Corporation (NYSE:X), also released its results that weren’t any better, but the company is in a good position to capitalize on the changing market conditions. Steel stocks have largely struggled in the past, with the exception of Nucor (NYSE:NUE), due to problems associated with overcapacity.

United States Steel Corporation (NYSE:X)

Amid the cost cutting initiatives, the Europe-based steel behemoth posted a net loss of $345 million, down from a profit of $92 million in the same quarter last year as sales dropped 16% from $22.7 billion in Q1, 2012 to $19.75 billion in Q1, 2013. EBITDA has also dropped to $1.57 billion from $2.12 billion a year ago as shipments fell 5.7% to 20.95 million metric tons. The latest EBITDA figure included $500 million from the sale of carbon credits and gains made on asset disposal.

The company has been focusing its investments towards mining. The unit’s operating income dropped 19% YoY to $286 million due to lower prices, despite the 7% rise in quarterly external sales to 7.3 million tons.

However, compared to the previous quarter’s net loss of $3.8 billion, the results show a considerable improvement. Shipments were also up 5% from the previous quarter. Earnings of the mining division were also up 54% sequentially. Moreover, the current EBITDA is above analysts’ estimates of $1.32 billion.

I believe that the sequential improvement is an indication that slowly but surely, the economic environment is improving. The company’s CEO, Lakshmi Mittal, said that the business environment will remain “challenging” and is expecting further sequential improvements in earnings as full year EBITDA is predicted to be more than $7.1 billion – as long as iron ore prices and steel margins do not fall below the 2012 levels. Moreover, to achieve the targets, the current cost cutting plans — to reduce $3 billion by 2015 — coupled with a 2% rise in steel shipments and a 20% rise in iron-ore shipments should also help.

United States Steel Corporation (NYSE:X)

ArcelorMittal’s results were a little better, if not worse, than that of its smaller rival United States Steel Corporation (NYSE:X) that missed both top and bottom line estimates. U.S. Steel’s first-quarter revenue dropped 11.2% year-over-year to $4.59 billion, missing analysts’ estimates by $70 million, while its adjusted loss per share of $0.35 was worse than the anticipated loss of $0.20 per share. However, I believe that United States Steel Corporation (NYSE:X) is better positioned than ArcelorMittal.

Nonetheless, the performance of steel companies in general has been far from impressive and the steel stocks have plummeted this year. Both ArcelorMittal and U.S. Steel’s shares have fallen nearly 18% since the beginning of the year. But Nucor has gained 10.8%. Incredibly, over the course of one year, Nucor, a major player in the struggling steel industry, has matched the performance of S&P 500 ETF (SPY). Nucor is one of the few steelmakers actually posting a profit and is fundamentally sound. I believe that Nucor’s investments in DRI will give it a cost advantage in the future and would reduce its reliance on using scrap metal in its mini-mills.

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