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U.S. Steel’s Tubular Segment Continues to Bleed amid Energy Rout

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U.S. Steel’s Tubular segment

U.S. Steel (X) previously enjoyed an impeccable market-leading position in the North American tubular goods market. Demand for tubular goods, which are used in the energy sector (VDE), was growing at a steady pace until a few quarters back. Tenaris (TS), Allegheny Technologies (ATI), and Nucor (NUE) also supply the energy sector.

2Q16 performance

U.S. Steel’s Tubular segment has historically been its most profitable segment. However, the financial performance of the Tubular segment has deteriorated over the last few quarters. The Tubular segment generated an EBITDA of -$528 per metric ton in 2Q16 as the graph above shows. That’s quite a lot of money to lose on a per-ton basis. What’s worse? The performance has only kept on deteriorating over the last couple of quarters. The Tubular segment generated an EBITDA of -$377 per metric ton in 4Q15 and -$528 per metric ton in 1Q16. The losses have only widened in 2Q16.

Outlook

Energy capex (capital expenditure) 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 much higher levels than where they are currently. However, this looks like a bleak possibility, at least for the 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 remains elevated. This will continue to put pressure on U.S. Steel’s Tubular segment. In short, U.S. Steel’s Tubular segment may not contribute to the company’s earnings for at least the next few quarters.

The Tubular segment’s 2Q16 results were more or less in line with expectations. However, the company’s Europe segment surprised markets as we’ll explore in the next part of the series.

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