On Jan 8, Zacks Investment Research downgraded U.S. Steel Corp. (X) to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold).
Why the Downgrade?
The recent plunge in oil prices is hurting U.S. Steel’s business in the energy market. The company recently stated that it is temporarily shutting down two tubular steel facilities, laying off more than 750 workers. It is idling its Lorain Tubular Operations in Ohio and another steel tube facility in Texas.
U.S. Steel cited falling oil prices and weakening tubular market conditions as reasons for the planned actions. Crashing oil prices are affecting demand for products from these plants. Several energy companies are dialing back drilling plans in the face of the oil price slump.
U.S. Steel, once the country’s first billion-dollar corporation, remains beset by weak steel market fundamentals. The company has posted losses for five consecutive years through 2013 on weak demand. However, the company’s losses narrowed in the third quarter of 2014 on the back of strong performance of its Flat-rolled division and continued benefits from its Carnegie Way program.
Current trends in the steel industry are not quite inspiring. Oversupply in the industry has put pressure on steel prices as Chinese steel production outpaced demand. In addition, China’s leading position in steel production may give the Chinese players a better control over pricing.
The low costs of production in China enable the Chinese companies to sell their product at cheaper rates, leading to an industry-wide price decline which may hurt the margins and earnings power of U.S. Steel.
The U.S. steel industry continues to contend with surging steel imports. This, in addition to the oversupply in the industry, is pressurizing prices and prospects of domestic steel producers. U.S. Steel’s Tubular segment remains challenged by weak pricing due to imports.
Other Stocks to Consider
Other companies in the steel and related industries worth considering include Synalloy Corp. (SYNL), LB Foster Co. (FSTR), Mechel OAO (MTL). While Synalloy holds a Zacks Rank #1 (Strong Buy), both LB Foster and Mechel retain a Zacks Rank #2 (Buy).
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