In the previous article, we looked at a possible outcome for U.S. Steel Corporation (X) if US steel prices don’t fall in 4Q17 amid lower steel scrap prices. However, it’s worth noting that, in the past, US steel buyers have tried to negotiate better pricing from US steel mills when scrap prices fall. Also, Chinese steel prices have come off their September highs. Lower seaborne iron ore prices could put further pressure on Chinese steel prices.
Given the above factors and the pending Section 232 probe, the United States could be a fertile ground for steel imports in 4Q17. The seasonal demand slowdown that we typically see in the fourth quarter might not help US steelmakers’ cause, either. Let’s look at what these factors could mean for U.S. Steel Corporation in 4Q17.
U.S. Steel Corporation mines iron ore from captive mines and buys coal under annual contracts in the United States. ArcelorMittal (MT) and AK Steel (AKS) also buy coal under annual contracts, which are the norm.
If steel prices follow steel scrap prices downwards in 4Q17, U.S. Steel Corporation could see margin compression. However, mini-mills, such as Nucor (NUE), might not see much margin pressure, as their input costs would fall in line with scrap prices (XME). Notably, U.S. Steel Corporation’s earnings tend to be quite volatile due to its high operating leverage, as shown in the graph above. In the next article, we’ll look at the key data points steel investors should watch this month.