On Dec 5, Zacks Investment Research downgraded steel giant U.S. Steel X to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
U.S. Steel remains battered by a challenging steel market environment. It logged a loss in third-quarter 2015, mostly due to a loss related to the shutdown of certain operations at its Fairfield Works plant. Adjusted loss was higher than the Zacks Consensus Estimate. Revenues slid year over year, and fell short of expectations.
U.S. Steel is struggling to cope with a barrage of low-priced steel imports. High levels of imports led to lower steel pricing in the third quarter, hurting U.S. Steel’s Flat-Rolled segment. Its tubular business was also affected by lower energy prices.
U.S. Steel, in its third-quarter call, noted that market conditions are not improving as it had expected in the second half of 2015. High levels of imports have not only put downward pressure on steel selling prices, but also had an unfavorable impact on the rebalancing of supply chain inventories, leading to lower customer order rates in the second half.
Imports and oversupply in the industry are pressurizing steel prices, thereby affecting margins of U.S. steel producers. A recovering economy coupled with a stronger dollar has made the U.S. an attractive market for finished steel imports. Accelerated steel exports from China in the face of a weaker yuan are hurting the American steel industry. According to American Iron and Steel Institute ("AISI"), estimated year-to-date market share of finished steel import is 30%, still higher than 28% recorded for full-year 2014.
U.S. Steel is also feeling the pinch of lower oil prices, which is affecting its business in the energy market. The combined impacts of the lower oil prices and low-priced imports have forced the company to take necessary actions including idling of a number of production facilities, resulting in the layoff of thousands of workers.
U.S. Steel, last month, said that it will temporarily halt steelmaking and finishing operations at its Granite City Works plant in Granite City, IL, as part of an ongoing adjustment of steelmaking operations throughout North America to meet customer demand. The company has issued notices to 2,000 employees at Granite City Works. This move reflects continued challenging market conditions including volatility in oil prices, dampened steel prices and unfairly traded imports.
Stocks to Consider
Better-ranked companies in the basic materials space include Worthington Industries, Inc. WOR, Grupo Simec S.A.B. de C.V. SIM and Taseko Mines Ltd. TGB with all holding a Zacks Rank #2 (Buy).
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