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No Gold No Glitter

19 September 2019 by jbchevrel

United States Steel Corporation (X) is a historic steel maker for autos, industrials, energy and construction sectors, with operations in North America and Europe. In 2018, X was #26 global with a tonnage of 15.4mt, #1 being ArcelorMittal (MTNA). Founded in 1901, X was the 1st billion-dollar market cap corporation in American history. As I write, X’s market cap is back below twice that amount ($1.9B), the stock having lost ~55% over past 6M. The CDS has been in the CDX HY since the s18 (included) and today the 5y spread widened by ~+100bp to ~650bp. In parallel the 6.875 Aug25s lost -2.25 points and the the stock lost -12%. The general selloff on the name occurred after X said that it expects a >exp loss, due to weakening markets for flat-rolled steel and tubular products, in particular for the energy industry. But it’s not just X. Interestingly, X is already the 3rd US steelmaker in 3 days to warn about their outlook (after #1 US #12 global Nucor Corp NUE and #46 US Steel Dynamics, Inc. -- as of 2018, based on tonnage). This is because the fundamental trend is the same for all steel makers: steel prices fall (US Midwest HRC steel futures have come down ~-40% over the past year, especially last Q2) and raw-material-related costs soar. And this will just squeeze margins in Q3, and probably also in Q4. As far as raw materials costs, i.e. mainly 1/ iron ore (where futures have gained ~+50% over the past year) and 2/ coking coal (where futures have gained ~+15% over the past year), the move has been pretty steep. Illustrating the systemicity of the move, X’s peer and competitor A.K. Steel Corp (AKS), also in CDX HY since s12, has widened +70bp on the 5y, today. X said that it expects Q3 adj. EBITDA of $115M (excl. -$53M from fire at Clairton coke making facility + restructuring charges), against a backdrop of ~$2.7B debt with ~$0.7B cash.