Profits surged in flat-rolled segment
In the previous part, we saw how profits surged in U.S. Steel Corporation’s (X) flat-rolled segment. In fact, U.S. Steel was able to beat street expectations primarily due to better-than-expected results of this segment. Let’s now analyze the possible reasons behind the solid performance of U.S. Steel’s flat-rolled segment.
Profits surged on improvements under Carnegie Way
The increase in profits at the flat-rolled segment was due primarily to Carnegie Way benefits. The previous chart shows the financial impact of Carnegie Way in 3Q14. As you can see, more than two-thirds of the benefits was realized in the flat-rolled segment. The improvements mainly came in manufacturing and the supply chain side.
Capacity utilization rate has increased
U.S. Steel (X) has closed down some steel plants due to overcapacity. It has increased production at the other facilities to compensate for this production loss. By increasing production at operational plants, the capacity utilization rate of U.S. Steel has increased. Higher capacity utilization rates benefit steel companies. You can learn more about the importance of higher capacity utilization rates by clicking here. U.S. Steel is not expected to add new capacity or restart idled plants anytime soon. This means it is expected to operate at higher utilization levels in coming quarters also. This is a positive sign for U.S. Steel (X) investors.
Lower raw material costs
Coal and natural gas are two key energy inputs for U.S. Steel. The prices for both these energy sources have come down. Coal prices have been on a southward journey, falling more than 25% this year. However, U.S. Steel has not been able to realize full benefits of falling coal prices due to long-term supply contracts with its suppliers. We will analyze this in greater detail in the coming parts of this series.
Next, we will look at the performance of U.S. Steel’s (X) European operations. The performance of this segment has also been better than expected, despite negative seasonality. ArcelorMittal (MT) is another steel company with exposure to Europe.
Please note that you can also access steel industry through State Street Global Advisors (or SPDR) Standard & Poors (or S&P) metals and mining exchange-traded fund (or ETF) (XME). Currently, Nucor (NUE) and Steel Dynamics (STLD) are among the top ten holdings of XME.