The global market for high performance alloys is currently going through somewhat of a boom thanks to its heavy use within the aerospace sector which is thriving due to heavy demand for long haul aircraft from Boeing and Airbus.. There is a silver lining, however, in the form of rising demand from growing economies like India, China, Thailand, and South Korea. This growth in demand is expected to benefit the steel producers in terms of price, revenue, and margin. Over the analyzed period we expect the global high performance alloy industry to consume over 400kt of high performance alloys.
We also expect the market to grow slightly above the level of global output and this is due to the vital industries that the high performance alloys are chiefly used in such as energy generation and medical care which are not directly correlated to global output. However leading industries that use high performance alloys such as the general industrial sector are highly correlated with global manufacturing output.
The shipments of United States Steel's (NYSE:X) tubular products stood at 1.88 million tons last year and are expected to increase by 2% this year. Drilling during oil extraction requires tubular products, and since there has been a recent increase in the price of natural gas and oil, the oil companies are increasing production. This will in turn increase the demand for tubular products.
- Warning! GuruFocus has detected 6 Warning Signs with X. Click here to check it out.
- X 15-Year Financial Data
- The intrinsic value of X
- Peter Lynch Chart of X
Overcapacity in the tubular products segment is likely to hurt the company's future pricing power, however. The supply and demand of tubular products corresponds with the number of rig counts because the rigs are the major user of these products. According to analysts, the number of rigs in North America will be 2,350 by 2016, which will lead to a demand of around 8.6 million tons of tubular products based on a consumption of 3,600 tons of tubular products per rig. This implies an increase of 0.9 million tons over the current consumption of 7.7 million tons.
Between 2013 and 2016, there are ten new tubular production facilities coming into operation in the U.S. These new mills will add 3.1 million tons to the current production capacity of 11.9 million tons, which could lead to a build-up of inventory. This build-up could stagnate prices at an average $1,000 per ton. This inflexibility in pricing is hurting United States Steel as its input costs are rising; as a result, the consensus of analyst estimate its revenue is likely to be $17.79 billion this year and increase to $18.6 billion next year.
ArcelorMittal (NYSE:MT) is increasingly focusing on mining to reduce its dependence on its ore suppliers. The Company has expanded its infrastructure by developing a wholly-owned 420 km railway for the ore mining project. The estimated cost to be around $1.4 billion and this allows greater access to the North American markets. The mining business of the company is targeting a production capacity of 84 million tons of iron ore by 2015. An expansion project in Quebec forms a major part of the global plan, with the Mining Canada business increasing its capacity from 16 to 24 million tons a year.
Such expansion with reduced dependencies is expected to boost the company's revenue. Analyst estimates that consolidated revenue may be around $81.21 billion this year and $83.13 billion next year, up from $1.92 billion last year.
The company is targeting the auto markets with its new ultra-lightweight car door. By combining advanced high and ultra high strength steel Areclor has been able to reduce the weight of baseline C-segment doors by 5 kg.
Current regulation in the U.S. and Europe demand more fuel-efficient and safe cars. According to company estimates, reducing the weight by 12 kg reduces carbon dioxide emission by one kilogram per kilometer.
While some global steel companies are strengthening themselves by reducing external dependence on suppliers, others are waiting for the industry demand to improve.
United States Steel continued to suffer from the oversupply of tubular products and cannot take advantage of increased oil extraction activities in the U.S. Meanwhile, the demand for high-end alloy steel from automobile industry in China and is also increasing creating new market for these steel manufacturers. ArcelorMittal's strategy of reducing its dependence on external suppliers for raw materials is on course. Its innovative car door is also a strong driver for revenue growth. I recommend a buy on the stock.
I recommend a these stocks for investors who are looking for long.