Department of Commerce Ruling Pressures U.S. Steel Stocks

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U.S steel producers U.S. Steel (NYSE: X  ) , Nucor (NYSE: NUE  ) and AK Steel (NYSE: AKS  ) have long been complaining about the absence of the anti-dumping measures on the steel market. The companies blame cheap imports for continuing pressure on the price of steel. However, the recent preliminary ruling of Department of Commerce rejected the claim that South Korea was selling tubular steel to the U.S. below cost. This ruling could be a warning sign for U.S. steel producers in their battle against imports.

U.S. Steel is affected the most
U.S. Steel, which in fact filed the claim, is most affected by this ruling. In its fourth quarter earnings call, the company stated that imports remained high and pressured its Tubular segment results. Cheap imported steel continued to pressure selling prices. The company expects that first quarter results for the Tubular segment will decrease because prices show no sign of recovery.

Nucor stated that the domestic steel industry's capacity utilization remained stuck in the mid-70% range. In such an environment, even an increase in demand would not be able to support to prices, as companies will rush to increase production.

The news is not that bad for AK Steel, as automotive market sales represent 50% of total sales and remain strong. The emerging threat from evolving aluminum-rich vehicles is yet to translate into increased pricing pressure. What's more, it's too early to say whether aluminum cars are an evolving trend or just an experiment.

Will domestic drilling support the tubular steel market?
The U.S. shale boom might have given some support to the tubular steel pricing. Unfortunately, domestic industry overcapacity and cheap imports don't give prices a chance to rise. Baker Hughes' January rig count revealed that the average number of U.S. rigs was almost flat compared to the previous month. Given the fact that the high growth rates of the domestic oil industry didn't translate into higher tubular steel prices, it's unlikely that slower growth rates could help lift prices in the future.

With no support seen from the demand side, U.S. steel producers remain in a tough operating situation. Hopefully for them, prices for the main materials used in steel production like met coal and iron ore remain depressed as well. Both the met coal and iron ore markets continue to be oversupplied. In addition, a weaker Australian dollar contributes to rising exports of met coal and iron ore from the country.

Bottom line
The market remains tough for U.S. steel producers. The recent ruling by the Department of Commerce won't make things any easier. U.S. Steel and AK Steel trade at cheap multiples, but they are cheap for a reason. Headwinds remain strong. In addition, both companies are highly leveraged. However, the companies have lost a huge amount of value since their highs seen several years ago, and existing problems could be already reflected in their share prices. 

The situation is better for Nucor, which retains an investment grade rating. The company sells at 14 times its future earnings and pays a dividend that yields almost 3%. The possible upside looks limited as steel pricing remains constrained.

All in all, investment in steel producers is not for the faint-hearted in the current environment.

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Vladimir Zernov

Vladimir Zernov believes that fundamental analysis works best with energy and materials stocks and covers them on Motley Fool.

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