Rising Imports Remain a Major Concern for U.S. Steel Companies

U.S. steelmakers Nucor (NYSE: NUE  ) and AK Steel (NYSE: AKS  )  released their first-quarter results this week. While Nucor reported a rise in its quarterly profit, AK Steel's loss for the quarter widened due to higher production costs and a blast furnace outage. There were some positives for both companies in the quarterly results. However, the biggest worry for steelmakers remains rising imports, especially from China.

Steelmakers report Q1 results
AK Steel reported its first-quarter results on Tuesday, posting a loss of $86.1 million, or $0.63 per share. This compares to a loss of $9.9 million, or $0.07 per share reported for the same period in the previous year. Excluding one-time items, the loss for the quarter was $0.40 per share, lower than the company's forecast calling for a loss of $0.44 per share to $0.49 per share.

AK Steel's loss widened mainly due to an unplanned outage of the Ashland Works blast furnace. Higher energy costs due to the extremely cold weather also had a negative impact on the company's bottom line.

Higher energy costs also hurt Nucor's bottom line. The company reported first-quarter earnings of $0.35 per share, which was in line with the guidance given by the company in March. Excluding one-time items, earnings for the quarter were $0.44 per share compared to Street estimates of $0.37 per share.

United States Steel  (NYSE: X  ) is scheduled to release its first-quarter results next week. 

Some positives
While first-quarter results were negatively affected by the extreme weather, there were some positives for Nucor and AK Steel. Nucor expects some improvement in the second quarter of 2014. The company sees improved performance at both its steel mills and its fabricated construction product businesses. The company also said that it remains cautiously optimistic about the small but noticeable improvement in the nonresidential construction markets in 2014. Construction spending in the U.S. rose sharply in January and February, according to data from the U.S. Department of Commerce.

AK Steel Chairman and CEO James L. Wainscott believes that having worked through the challenges in the first quarter, the company is well positioned for a much improved second quarter.

Indeed, a recovering U.S. economy augurs well for steelmakers. In fact, this was the reason behind the rally in steel stocks in the second half of 2013. In a recent report, the World Steel Association said that steel demand will grow by 4% in 2014, indicating that the downturn in the industry has ended. However, as I have noted in previous articles, steel companies will not be able to fully capitalize on the rebound in steel demand in the U.S. due to rising cheap imports. In fact, steel companies already raised concerns over this issue earlier this year.

Rising imports a worry
While steel demand in the U.S. is expected to rebound, there is likely to be a slowdown in China as the world's second-largest economy rebalances. Given the overcapacity in China, this means that the country is likely to export more. Add to this the fact that Chinese steel trades at a significant discount to steel prices in the U.S. Not surprisingly, U.S. steel companies are worried about cheap imports hitting the U.S. market.

Nucor, which cited high import levels as one of the reasons for a sequential decline in its first-quarter earnings in March, once again noted this week that import levels negatively affected pricing and margins at its bar and sheet mills. More importantly, going forward, the company expects imports to continue to pressure pricing and margins at its steel mills.

Rising imports are the biggest worry for U.S. steel companies right now. Their only hope is that China launches a large stimulus package to boost its economic growth. However, that is not likely to happen. Despite a slowdown in economic activity, Chinese policymakers have not shown any will to introduce a large stimulus package, which is important to absorb the excess capacity in the country's steel industry. And that dampens the outlook for U.S. steel companies despite an anticipated rebound in domestic demand.

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