NEW YORK (TheStreet) - U.S. Steel (X) has been working on a turnaround by cutting back on expenses and lifting its sales. The Pittsburgh company surprised the market with a second quarter adjusted profit in July and followed that up in late October with its highest third-quarter segment operating income since 2008.
However, the performance of the second-largest steel producer in the U.S. will likely go downhill from here, thanks to deteriorating oil prices and increasing competition from foreign producers.
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U.S. Steel serves the energy market via its tubular business, which is its second-largest source of earnings overall, responsible for 18.3% of the company's total segment income from operations in the first nine months of this year. The company is the biggest producer of energy tubular products in North America.
In an email interview with TheStreet, Charles Bradford, president of the metals and mining investment research firm Bradford Research, said the tubular business, which has been highly profitable for a number of years, was already on the "edge of disaster." The consumption for tubular goods, such as pipelines, stands at between six and eight million tons while four million tons of new capacity is either being built or being finished to fill this gap. As such, "U.S. Steel's tubular business was likely to suffer from lower prices" due to the new supply.
Further, the 48% drop in WTI future prices over the last six months to its multi-year lows will impact the amount of drilling activity in 2015. A handful of oil producers, such as ConocoPhillips (COP) and Oasis Petroleum (OAS) , have already announced capital expenditure cuts but Goldman Sachs's Brian Singer said in his recent report that other oil producers will make similar announcements through February.
For U.S. Steel's tubular business, a slowdown in oil and gas drilling will impact the demand side of the equation, which will exacerbate the pricing environment.
Moreover, cheaper foreign steel will exert downward pressure on domestic prices, narrowing the premium over global prices which U.S. steel producers have been enjoying for years.