U.S. Steel’s 2017 guidance
U.S. Steel Corporation (X) was able to beat its 4Q16 earnings estimates by a wide margin. While the earnings beat certainly helped restore investors’ confidence in the steel giant, the company’s fiscal 2017 guidance also impressed Wall Street.
Raw material costs
U.S. Steel produces steel in blast furnaces and uses coking coal, steel scrap, and iron ore (CLF) as raw materials. AK Steel (AKS) and ArcelorMittal (MT) also use coal for their blast furnaces. Mini-mills such as Nucor (NUE) use electricity as a raw material. There were concerns that U.S. Steel’s coal costs could spike in 2017, as coking coal prices rose steeply in 2016.
U.S. Steel noted that it was able to allay market fears by saying that its “delivered coal cost is expected to increase by $19/ton in 2017 compared to 2016 coal costs.” This statement refers to the company’s annual contracts in the United States.
Given the increase in iron ore and scrap prices, as well as U.S. Steel’s exposure to quarterly coal contracts in Europe, the company expects higher raw material costs to be a $1 billion headwind in fiscal 2017 compared to fiscal 2016.
U.S. Steel noted that it is working on an “asset revitalization plan,” and that investment in this program would be $200 million higher in 2017 compared to 2016. Despite these cost headwinds, U.S. Steel expects to post EBITDA[1. earnings before interest, tax, depreciation, and amortization] of $1.3 billion in 2017.
Wall Street took note of U.S. Steel’s better-than-expected 2017 EBITDA guidance, and we saw some analysts upgrade the stock after its 4Q16 earnings release. In the final article of this series, we’ll analyze the upside and downside to U.S. Steel’s 2017 EBITDA guidance.