U.S. Steel’s Tubular segment
U.S. Steel (X) enjoyed an impeccable market-leading position in the North American tubular goods market. Demand for tubular goods, which are used in the energy sector, was growing at a steady pace until a few quarters back. Tenaris (TS), Allegheny Technologies (ATI), and Nucor (NUE) also supply the energy sector.
U.S. Steel’s Tubular segment has historically been its most profitable segment. Although the segment accounted for only about one-sixth of U.S. Steel’s revenues, the profit contribution was much more. Even at the height of the global financial crisis of 2009, U.S. Steel’s Tubular segment generated a positive EBITDA (earnings before interest, taxes, depreciation, and amortization). Although the segment did report losses in the second and third quarters of 2009, it managed to post a positive EBITDA in fiscal 2009. To be sure, that was the time when the entire steel industry was bleeding red ink.
However, the financial performance of the Tubular segment has deteriorated over the last few quarters. The Tubular segment generated a EBITDA of -$234 per ton in 3Q15 and -$377 per ton in 4Q15, as the graph above shows. That’s quite a lot of money to lose on a per-ton basis.
It’s important to note that there’s nothing much that U.S. Steel can do to stop these losses. The capacity use ratio in U.S. Steel’s Tubular segment fell to a dismal 15% in 2Q15. It’s nearly impossible to generate profits with plants operating at such rates.
Energy capex needs to come back for U.S. Steel’s Tubular segment to turn around. For the capex cycle to turn around, energy prices need to stabilize at a much higher level from what they are currently. However, that looks like a bleak possibility, at least in the near foreseeable future.
The demand for tubular products is expected to be subdued in the coming months as well. To add to that, the supply chain inventory continues to be at elevated levels. This will continue to put pressure on U.S. Steel’s Tubular segment.
In short, investors cannot rely on U.S. Steel’s Tubular segment to pull it out of the current slump. Can Europe, which has been U.S. Steel’s most profitable segment in the recent quarters, help U.S. Steel’s earnings in fiscal 2016? We’ll find out in the next part of this series.