U.S. Steel Producers Brace for Tough Year Ahead as Raw Materials Prices, Capacity Increase

Companies report improved results in the third quarter but expect higher costs and lower margins.

U.S.-based steel producers expect rising raw materials prices, a sluggish construction market and expected increases in capacity to dampen otherwise encouraging results in the third quarter.

United States Steel Corp. reported on Oct. 25 a profit of $22 million, or 15 cents a share, in the three-month period compared with a $51 million, or $1.33 per-share, loss a year earlier.

The company attributed the gains to strong performances in its flat-rolled segment and tubular goods. Flat-rolled steel is commonly used in automobile and appliance applications.

The company's tubular products have benefited from increasing demand for pipe materials from the oil and gas industry.

West Chester, Ohio-based AK Steel Holding Corp. narrowed its third-quarter loss to $3.5 million, or 3 cents a share, compared with a $59.2 million, or 54 cents per share, loss in the year-earlier period. The company's results include after-tax expenses of approximately $6.2 million related to damages at its Butler Works furnace in Butler, Pa.

On Oct. 20, Nucor Corp. reported a profit of $181.5 million, or 57 cents a share, compared with $23.5 million, or 94 cents a share, in the previous-year period. The Charlotte-based company said it benefited from the strengthening end markets, such as auto, heavy equipment and energy.

Cloudy Future

But steel producers seem less optimistic about the months ahead. AK Steel expects to generate an operating loss in the fourth quarter on lower selling prices for carbon and stainless-steel products, said President and CEO James Wainscott in a conference call with analysts.

In the fourth quarter, U.S. Steel expects its tubular products segment to post similar positive results to the third quarter. But it projects lower operating results for its North American flat-rolled and European operations because of slow economic recovery in the regions, said Chairman and CEO John Surma in a statement.

The struggling housing and construction market continues to hamper steel producers. Between 1959 and 2007 the number of housing starts in the United States never fell below 1 million, Wainscott said in the earnings call. The steel industry is now contending with four consecutive years below the 1 million mark.

"We're seeing a significant deterioration in prices to the point where they might be going under costs, and that's dangerous," says steel industry analyst and founder and president of Locker Associates Inc. "Some people have attributed that to the weak economy, particularly construction, which consumes a lot of steel."

U.S. Steel said its flat-rolled income from operations was $53 per ton compared with $95 a ton in the second quarter. The company attributed the decrease to lower prices related to increased capacity levels in the United States and high import levels.

Expansion and mill startups by newer, primarily foreign steel producers in the United States have created excess steel capacity, which has also impacted prices, Locker says.

"When you come into the market you tend to lower prices to win market share," Locker says. "They're offering steel at a steeper discount. They claim they're not, but I'm sure it's going on."

Nucor also expects lower earnings in the fourth quarter due to falling prices.

"We expect further margin compression in the sheet market in the fourth quarter," the company said. "We also expect a smaller compression in plate margins due to imports."

See also:

Domestic Steel Producers Grappling With Rising Costs, Excess Capacity

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