Why Did US Steel’s Stock Price Decline By 50% In 2018, In Spite Of Tariffs On Steel Imports?
United States Steel Corporation (NYSE: X), an integrated steel producer with major production operations in the US and Central Europe, saw a significant decline in its stock price in 2018. Ever since the tariffs on steel imports were officially implemented on June 1, 2018, the company’s stock has fallen from about $37 to $18 at the end of December 2018. If we look at the full year’s picture, US Steel has shed more than 50% of its share value, from $39.40 in Jan 2018 to $18.24 on Dec 31, 2018.
View the interactive dashboard that we have created – What dragged US Steel’s stock price lower by more than 50% in spite of tariffs on steel imports?
Though the tariffs were supposed to help the domestic steel companies, history has shown that tariffs are only a short term fix. Though the domestic mills are operating at over 80% of their capacity, which is an impressive rise over a year ago, steel still remains a global commodity with a global market. Even with the current level of capacity utilization, the US still needs to import about 30 million tons of steel. Imposition of tariffs moves the demand towards domestic steel companies, but it does not help in addressing the supply situation, which still remains low domestically. American steel consuming industries have to now pay higher taxes to the federal government for these imports. We had seen a similar decline in US Steel’s stock price when tariffs were imposed by the Bush administration in 2002. Last year, along with US Steel, many of its competitors, like Nucor and Steel Dynamics, saw a decline in stock price, albeit not as significant. However, tariffs are just one part of the story. Following are the two main reasons for a sharp decline in US Steel compared to its peers.
US Steel manufactures steel using traditional blast furnaces that are time-consuming, complex, and offers limited flexibility with their capital-and labor-intensive nature. Nucor and Steel Dynamics, on the other hand, use electric mini-mills, which are smaller in size, but these mills use scrap to manufacture steel, which lowers raw material costs significantly. Smaller scale and size mean low capital and labor requirements, higher flexibility in production, and proves useful during tough business conditions. Thus, US Steel has seen much lower growth in margins compared to its rivals, over the years.
No free cash flow
US Steel has been able to beat its own estimates and has raised its performance guidance for 2018. However, the market does not seem to be impressed with this. This was mainly due to the company not being able to generate any free cash flow. The company’s flat-rolled segment asset revitalization program that aims to increase productivity and reduce cost in the long term, has led to a planned outage at its Great Lakes Works facility. Though the $2.0 billion program, which would end in 2020, is expected to add $275 million to $375 million annually to the company’s EBITDA, the market is clearly not impressed as the company is currently burning a lot of cash. Though net income is expected to increase by about 80% (y-o-y) in 2018, it would not translate into higher cash on the books. The company is expected to end 2018 with a net cash outflow of $433 million. A higher capital spending – about $1 billion – in FY 2018, for the revitalization program, is proving to be the main drag on its cash flow.
US Steel’s investors seem to have punished the company’s management for making wrong decisions at the wrong time. The company is burning cash for reviving its existing plants at a time when rivals were already prepped up to take advantage of higher steel prices due to tariffs. Though the revitalization program might lead to higher margins for the company in the long run, investors were not impressed with the timing for carrying out such a large capital spending program.
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