United States Steel (X -0.49%) is one of the oldest steel makers around, holding an iconic place in the industry even if it is no longer the leading company in the space. Part of the problem stems from its long history, even though the company has been using the most recent industry upswing to traverse a more stabilizing path. Here's why, despite the changes that are taking shape at U.S. Steel, it still isn't as well positioned as some key peers.
Some notable changes
The steel industry has put together a string of very strong years. While 2022 didn't set a record on the earnings front, U.S. Steel's adjusted earnings per share figure of $9.95 was the second-best in its history. The best year, meanwhile, was 2021, when the company's adjusted earnings hit $13.48 per share.
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The strong financial performance in 2021 and 2022 was incredibly important for U.S. Steel, because it allowed the company to strengthen its balance sheet. To put a number on that, the company's debt-to-equity ratio, a measure of leverage, fell from around 1.2 at the start of 2021 to a current level of roughly 0.4. This is right in line with key industry peers Nucor, the largest name in the domestic steel industry, and Steel Dynamics, a younger and fast-growing competitor. Basically, U.S. Steel was able to use the upturn to bring itself back in line with peers with regard to a key financial risk metric.
U.S. Steel has also tried to better align with Nucor and Steel Dynamics in another way, by adding an electric arc minimill to its portfolio. It started this process with an acquisition, but has plans to keep going with the construction of a new mill. Although this is good news overall, it also highlights why investors need to remain wary of U.S. Steel.
Different dynamics
Electric arc minimills are fairly flexible and can more easily ramp up and down along with demand in the highly cyclical steel industry. Nucor and Steel Dynamics make exclusive use of minimills. They are both much younger companies than U.S. Steel, which was founded when blast furnaces were the way steel was made. Blast furnaces make what's known as primary steel from iron ore, while electric arc minimills make extensive use of scrap steel, essentially melting steel that already exists.
Blast furnaces are important and U.S. Steel intends to continue operating these facilities as it looks to be a "best of both" steelmaker. The problem is that blast furnaces require a lot of money to operate. In good steel markets that's not a problem, with big demand generally leading to big profits. The trouble comes when the industry is in a down swing, at which point the high costs of a blast furnace generally lead to red ink. Electric arc minimills can adjust more easily and remain profitable in most steel market environments.
U.S. Steel adding electric arc minimills to its production portfolio is great news, as it will likely help to smooth out the company's financial performance through the cycle. But, being the "best of both" means that it still has to contend with the expensive blast furnaces it owns during industry downturns. And that will likely lead to laggard performance relative to peers focused on minimills when tough times inevitably arrive.
Great strides, but...
The current steel industry upturn has been a good period for U.S. Steel, as it has used strong performance to mend its balance sheet and diversify its business. However, investors shouldn't get overly excited about the prospects here because the continued use of expensive-to-run blast furnaces will likely be a notable drag during downturns. If you are looking for a long-term investment in the steel sector, Nucor or Steel Dynamics would probably be better options.
