uploads/2016/11/part-6-unit-costs-1.png

Why U.S. Steel Investors Should Brace for Higher Input Costs

By

Updated

Higher input costs

U.S. Steel Corporation (X) produces steel in blast furnaces and uses coking coal and iron ore (CLF) as 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.

Both iron ore and coking coal prices have seen substantial upward price action in 2016. Coal especially has been on a tear, with spot seaborne prices more than tripling since the beginning of the year. While U.S. Steel is somewhat protected from the spike in iron ore prices given its captive iron ore mining operations in the United States, it could see a rise in its coal costs in the coming quarters.

Article continues below advertisement

Higher coal costs

Following its 3Q16 earnings release, U.S. Steel indicated that some of its coal contracts “involve both supply and price certainty that extend beyond the current year.” This statement basically means that these contracts may not be affected by big spikes in coal prices. However, the company didn’t provide information about what percentage of its annual coal contracts are fixed contracts.

Higher maintenance costs

During its 3Q16 call, U.S. Steel talked about the need to “revitalize” its facilities, which would lead to higher capital expenditure in the coming quarters. Notably, higher maintenance activity could not only increase costs, it could also lead to outages that could negatively impact U.S. Steel’s shipments next year. As noted in the previous article, U.S. Steel’s 3Q16 shipments and earnings were also negatively impacted due to unplanned outages.

Meanwhile, despite near-term headwinds, Donald Trump’s election seems like it could be a game changer for U.S. Steel. Read Why Donald Trump Could Be a Game Changer for US Steel Companies to explore this idea further.

You can also visit Market Realist’s Steel page for ongoing updates on this industry.

Advertisement

More From Market Realist