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U.S. Steel’s 3Q16 Call Leaves Some Unanswered Questions

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Nov. 7 2016, Updated 10:04 a.m. ET

U.S. Steel’s 3Q16 call

So far, we’ve looked at U.S. Steel Corporation’s (X) 3Q16 earnings and 2016 guidance. In this article, we’ll analyze other key takeaways from the company’s 3Q16 earnings call.

U.S. Steel produces steel in blast furnaces and uses coking coal and iron ore (CLF) as a raw material. AK Steel (AKS) and ArcelorMittal (MT) also use coal for their blast furnaces. Mini-mills such as Nucor (NUE) use steel scrap and electricity as raw material.

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Coal contracts

Spot seaborne coking coal prices have been on fire this year. They’ve almost tripled since the beginning of the year. During its 3Q16 earnings call, U.S. Steel said that it has annual coal requirements of 6.5 million to 7.0 million tons in US operations and approximately 2 million tons in Europe operations.

Following its 3Q16 earnings release, U.S. Steel indicated that some of the company’s coal contracts “involve both supply and price certainty that extend beyond the current year.” This basically means that these contracts may not be affected by the big spike in coal prices. However, the company did not provide information on what percentage of its annual coal contracts are under these fixed contracts. The markets will have to wait for the company’s 4Q16 call for more updates.

Capital expenditure

During its 3Q16 call, U.S. Steel talked about the need to “revitalize” its facilities, which would lead to higher capex in the coming quarters. In response to a question on whether the increased capex is the result of underspending in previous quarters, U.S. Steel CEO Mario Longhi said that the company has not been underspending, but “investing appropriately.” However, he also added that since the company’s balance sheet is in a better shape now, it can “accelerate in investing more quickly.”

U.S. Steel’s 3Q16 earnings results led to some analysts cutting their target price for the company. We’ll discuss this more in the next and final article of this series.

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