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Despite the Improving Global Economy, U.S. Steel Producers are Missing Out

By Bob Ciura - Feb 28, 2014 at 10:29AM

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Even though steel company profits are tied to the broader economy, U.S. Steel and Steel Dynamics aren't enjoying the fruits of steady global growth. Here's why Arcelor Mittal is a better bet.

Steel is a highly cyclical industry. Profits for steel producers including Steel Dynamics (STLD -3.12%) and U.S. Steel (X -2.24%) are highly correlated to the global economy. Not surprisingly then, the entire steel industry was brought to its knees by the financial crisis and ensuing recession in 2008 and 2009.

You'd think the steel producers would be enjoying the benefits of the steady economic recovery in the years since, but for certain steel companies, that hasn't been the case. Falling margins served as an anchor on Steel Dynamics last year, while massive impairments of non-performing assets continue to dog U.S. Steel.

For investors losing patience in the lackluster performance of these two domestic steel giants, global steel producer ArcelorMittal (MT -5.11%) is executing much better and should be considered the top industry performer of the three.

U.S. Steel and Steel Dynamics fail to impress
U.S. Steel's two major segments, flat-rolled and tubular, both posted very poor operating results last year. In 2012, those two segments combined to generate $766 million in operating profit. Last year, the two collectively posted just $295 million in operating profit. That represents a whopping 61% decline over the course of one year.

As if that weren't bad enough, U.S. Steel's problems were exacerbated by a $2 billion non-cash impairment charge against earnings. Of this, $302 million was due to the shutdown of the iron and steelmaking Hamilton Works facilities. All told, U.S. Steel lost $14.27 per share last year.

U.S. Steel Chief Executive Officer Mario Longhi stated his company is on a "multi-year journey to earn the right to grow" by restructuring its balance sheet and improving efficiency. As a result, investors shouldn't expect much near-term improvement.

Meanwhile, Steel Dynamics posted net sales and operating profits were relatively flat last year compared with 2012. The company struggled even though shipments rose, because metal margins declined for both steel and recycling operations. The average realized steel price per ton dropped from $831 in 2012 to $793 last year, which represents a 4.5% decline.

Management is still seeing difficult conditions in nonresidential construction, which clouds the outlook in the upcoming year. At the same time, management is cautiously optimistic that increased infrastructure spending and modest growth in construction will hopefully make 2014 a better year.

ArcelorMittal bucks the trend
Global steel producer ArcelorMittal is one of the bright spots in the industry. It's seeing the benefits of a revised management strategy. In recent months, ArcelorMittal focused itself on strict capital discipline, along with targeted investments in energy steel markets. These measures helped boost its bottom line, even though sales continue to lag.

ArcelorMittal's iron ore production and crude steel production both rose last year, which allowed earnings before interest, taxes, depreciation, and amortization (EBITDA) to increase 11% in 2013. In addition, ArcelorMittal posted positive free cash flow and ended the year with net debt at its lowest level since 2006.

Continuing focus on paying down debt and pursuing the energy steel market provides management a great deal of confidence in the future. ArcelorMittal's projects for 2014 call for another year of steady recovery, in which its EBITDA is expected to rise further to approximately $8 billion.

Go with the industry leader
Steel remains on a difficult path, despite the steady global economic recovery. It does not appear that the over-arching concerns facing the steel industry in the United States have subsided. Steel Dynamics continues to experience significant margin pressure from falling prices. Meanwhile, U.S. Steel was forced to shut down facilities and take huge write-offs, which will likely have a lasting effect.

On the contrary, ArcelorMittal has taken the necessary steps to get its financial house in order. It's paying down debt and focusing on higher-performing areas of the steel market. These initiatives resulted in measurable growth last year, and should keep the company on a better path than its rivals in the upcoming year.

Steel is still important, but it's being phased out of the automotive market

Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

ArcelorMittal Stock Quote
$23.42 (-5.11%) $-1.26
Steel Dynamics, Inc. Stock Quote
Steel Dynamics, Inc.
$81.80 (-3.12%) $-2.63
United States Steel Corporation Stock Quote
United States Steel Corporation
$23.14 (-2.24%) $0.53

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