Weak volumes and prices drive losses

United States Steel Corporation (X) recorded its third sequential loss — $3.03 billion or $2.11 per share in the third quarter of 2009 in contrast to a net income of $9.19 billion or $7.79 per share in the third quarter of 2008. However, losses narrowed sequentially and were lower than the Zacks Consensus Estimate of a loss of $2.91.

On a year-over-year basis, revenues were down 61% to $2.82 billion, driven by a 35% year-over-year decline in total steel shipments to 4.2 million tons. However, shipments increased 41% quarter on quarter. The company saw lower year-over-year volumes and prices across all major segments on the back of a slump in the economy.

Additionally, increasing competition from China and weak demand in major markets, especially Europe, which resulted in lower capacity utilization have impacted results. Two of the company’s major business segments reported losses. However, the losses were smaller sequentially at its European operations and North American Flat-rolled business.

Flat-rolled

During the quarter, Flat-rolled shipments declined 40% year over year to 2.7 billion tons, and average prices fell 33% to $605 per ton. The segment reported operating loss of $370 million in contrast to an operating income of $846 million in the same quarter of the previous year. Operating losses in the quarter included costs associated with idled facilities.

Sequentially, operating losses remained almost flat, reflecting improved operating efficiencies, higher shipments and lower inventory write-downs. Selling prices declined 11% from $677 per ton while volumes increased about 50%. Raw steel capability utilization for the quarter increased to 58% from 32% in the second quarter, reflecting steelmaking facility resumptions at the Granite City Works, Great Lakes Works and Hamilton Works.

US Steel Europe

On a year-over-year basis, shipments declined 8.5% to 1.3 billion tons while average prices were down 43% to $615 per ton. The segment posted modest operating income of $7 million compared with operating income of $173 million in the year ago period on lower raw material and energy costs and improved operating efficiencies. However, results of the segment improved significantly when compared sequentially due to lower improved selling prices, raw material costs, sales of emissions allowances and lower inventory write-downs.

Quarter on quarter, prices improved 22% from $602 per ton. Raw steel capability utilization for the quarter increased to 82% from 57% in the second quarter of 2009. The company restarted its third blast furnace at its subsidiary, U.S. Steel Kosice (USSK) in early September and operated both blast furnaces at U.S. Steel Serbia for most of the reported quarter.

Tubular Products

Shipments of Tubular Products were down 71% to 151 million tons and averaged realized prices were down 38% to $1,474 per ton. Operating losses amounted to $21 million compared with operating income of $420 million in the same quarter of the previous year. Results of the segment reflected the impact of lower oil and gas exploration and production activity, high inventory levels and the surge of Chinese products. However, reported losses narrowed from $88 million on a 64% rise in shipments from 92 million tons reported in the previous quarter.

Guidance

U.S. Steel expects results to improve in the fourth quarter of 2009 driven by expected increased demand for Flat-rolled products in North America, on the back of higher demand from the end user automotive industry and continued strength in tin mill markets. However, the company is expecting operating losses in the fourth quarter on lower operating rates and idled facility carrying costs for both Flat-rolled and Tubular segments.

The company also stated that demand in Flat-rolled and U.S. Steel Europe have decreased from the reported quarter due to seasonal slowdowns. In order to adjust production to meet customer order rates, the company expects to idle the 14 blast furnaces at its Gary Works for maintenance, as well as one of two furnaces at Granite City Works. As a result, fourth quarter raw steel capability utilization rates are expected to be in line with the latest quarter levels.
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