U.S. Steel: Troubles Compound amid Market Downturn

Moody’s placed U.S. Steel’s ratings on review for a downgrade. Analysts have also been turning bearish on the stock.

U.S. Steel’s faces a downgrade

On Wednesday, Jefferies lowered U.S. Steel’s (X) target price from $16 to $14. Jefferies also lowered the target price in July. The stock has sold off badly this year. Overall, the stock has fallen 33% this year. The company lost almost 50% of its market capitalization last year. AK Steel (AKS) fell 60% last year. However, AK Steel has risen 4.8% in 2019. In June, U.S. Steel announced the partial closure of two of its US blast furnaces. The partial closures were due to the sharp fall in US steel prices.

Moody’s placed U.S. Steel on review for a downgrade

Moody’s placed U.S. Steel’s corporate family rating on review for a downgrade. Meanwhile, the agency downgraded the company’s Speculative Grade Liquidity rating by one notch. Moody’s cited weak end markets in Europe and the US for its decision. The agency talked about falling steel prices and higher raw material prices. Moody’s also listed the company’s higher capital expenditure. While US steel stocks have sagged this year, President Trump said that the industry is “thriving” under his presidency.

Rising capex in weak markets 

U.S. Steel is aggressively spending to revamp its plants. The company already had a $2 billion asset revitalization plan in place. In May, the company announced a new round of investments that would cost $1.2 billion. The company is investing in its plants when markets are in a downturn. The company’s balance sheet doesn’t give it the desired leeway. The company would have to take on more debt to fund the capex. U.S. Steel will likely post negative free cash flows between 2019 and 2021 due to its aggressive capex plan.

How does the company plan to fund the capex?

During the second-quarter earnings call, U.S. Steel listed the various avenues it will use to raise cash for its capex program. The company looked at a mix of environmental revenue bonds, vendor-supported financing, revolver facility, and high-yield debt to fund its capex. Notably, the company expects its blended coupon to be close to 6% for the additional borrowings. If Moody’s downgrades the ratings, the company might have to incur higher interest expenses for its borrowings.

Trade tensions and recession fears

Trade tensions and recession fears have hit the sentiments in the metals and mining space. The stock prices have been volatile amid trade war news. A tweet from President Trump could trigger massive price movement in stock prices. In June and July, domestic mills successfully raised flat-rolled steel prices. However, the pricing has been stagnant this month. Now, we’re heading towards the seasonally weak fourth quarter. US steel prices are usually weak in the fourth quarter. Looking at the current markets, domestic mills might have a hard time increasing prices more from these levels.