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What Factors Will Drive U.S. Steel’s 2016 Performance?

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Jan. 28 2016, Updated 3:35 p.m. ET

U.S. Steel’s 2016 performance

Previously, we noted that in 2016, U.S. Steel (X) expects to break even at the EBITDA (earnings before interest, taxes, depreciation, and amortization) level and burn $200 million in cash if market conditions don’t improve from here. In this part of the series, we’ll be looking at the different factors that will drive U.S. Steel’s 2016 performance.

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Upside potential

The graph above shows the trend in hot-rolled coil prices in the US as estimated by Metal Bulletin. Spot HRC prices are currently hovering in the ballpark of $400 per short ton. Spot steel pricing seems to be stabilized for now and has in fact inched up somewhat as domestic steel companies have increased their base selling prices. Some analysts have a bullish outlook for spot steel prices in 2016. Bank of America expects spot HRC (hot-rolled coil) prices to average $455 per short ton in 2016. If steel prices average more than $450 in 2016, as some of the analysts are expecting, U.S. Steel investors could be in for a decent ride this year.

Downside risks

However, we’ll have to wait a couple of months to see if the price hikes stick. Last year, price hikes by steel mills including AK Steel (AKS) and ArcelorMittal (MT) failed to hold ground for more than a month. Steel companies’ ability to raise their base selling prices would also depend on the prevailing market sentiments. If market sentiments continue to deteriorate, price hikes might not hold ground.

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In the last couple of months, US steel companies have cut their production steeply. To add to that, steel imports have also come down. This seems to have created a scarcity of steel in the spot markets. However, global markets are still flooded with steel. If spot steel prices rise much further, we might see more imports entering the US. Any increase in steel imports would put pressure on US steel prices.

U.S. Steel’s 2016 plans could go astray if spot steel prices fall from these levels. Moreover, the company has not really been able to live up to its scaled back guidance from last year. If U.S. Steel’s EBITDA turns negative this year and the cash burn exceeds the estimated figure, we could see more downside for the stock.

Read Will the Steel Industry’s Woes Continue in 2016? to find out more about the industry outlook. Investors who want to avoid the hassles of picking individual stocks can also consider the SPDR S&P Metals and Mining ETF (XME). Currently, XME has invested almost half of its holdings in US-based steel companies. Commercial Metals Company (CMC) forms 5.2% of XME’s portfolio.

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