U.S. Steel Finds Some Relief With Labor Peace

Metallurgy giant U.S. Steel (NYSE: X ) is breathing a huge sigh of relief after it closed a labor contract with United Steelworkers, the massive union that represents the employees of it and its big rival, ArcelorMittal (NYSE: MT ) . The deal wasn't onerous, was largely fair to all sides concerned, and lasts for three years. For the most part, all is now quiet on the labor front. So why wasn't the market happier about the news?

Fundamental concerns
Shares in both companies dropped in price the day the news was announced, with U.S. Steel shedding about $0.25 to end slightly lower and ArcelorMittal losing more than $0.50 in a 3.6% drop from the previous day's close. Granted, the day was fairly bearish for the market overall, but for the most part labor deals are positive, stock-price-boosting events -- particularly for old-school industrials like steelmakers that depend heavily on armies of blue-collar workers.

These days, though, for investors in the metallurgy sector it's not industrial relations they're worried about. Rather, it's the tough conditions of the market. The No. 1 crude steel producer by far these days is China. Despite its economic slowdown, it's still building like a demon -- to feed this demand it produced around 684 million metric tonnes in 2011, a 45% increase over the previous year.

By comparison, the U.S. cranked out 86 million (a 6% annual gain), while the 27 European Union nations -- No. 2 behind China -- produced 177 million for a 12% increase. All told, China was responsible for just over 45% of the entire world's production last year.

Still, there's room for more. China's the No. 4 importer of the stuff, taking in around 3.5 million metric tonnes in 1Q 2012. But these numbers aren't as impressive as they first appear.

Empty buildings
Unfortunately for the U.S. Steels and ArcelorMittals of this world, China's once-hot construction market has cooled down significantly. Real estate sales are down significantly and builders are struggling to complete their projects before prices drop further. This trend looks like it'll continue, despite the government's recent $160 billion infrastructure stimulus to get industries like construction moving again.

Outside of China, few markets on the globe are growing much. India and other corners of Asia are somewhat booming at the moment, but demand is relatively light and much of it can be met by domestic or regional production. Europe's financial crisis means that few are venturing to put up new buildings, while the cautious American economy likely isn't going to produce spikes in demand for steel anytime soon.

As a result, prices for the metal have taken a nose-dive. Spot prices on the London Metals Exchange for steel billet (i.e. bars) stood at around $340 the day the union agreement was announced. This is quite a comedown from the $600 or so the commodity traded for in early October of last year.

Ouch. A nearly 50% drop in price is a killer for any company hoping to make a buck from steel. It's the knife slicing across the results of all the majors; for U.S. Steel, it's resulted in a stagnant top line and a pair of $200-million-plus losses in the last four quarters. ArcelorMittal's revenue has similarly gone nowhere; admirably, the company has managed to net profits more often than not over the past year.

Determined rivals like Nucor (NYSE: NUE ) and AK Steel (NYSE: AKS ) are struggling too. The former has also seen top-line stagnation over the past year, although it's managed to eke out some net profit in each of the preceding four quarters and expects a similarly thin net margin for the third quarter. The latter has suffered a streak of four consecutive losing quarters, its latest ending $724 million in the red.

Cold steel
So, few investors are going to be assuaged by good news in the labor sphere for the steelmakers. The fundamentals underpinning the industry are weak at the moment, and seem unlikely to strengthen anytime in the foreseeable future.

Rather, the outlook seems to be brighter for companies such as Cliffs Natural Resources (NYSE: CLF ) and Peabody that sell the raw materials (pig iron, metallurgical coal) which go into the steelmaking process. To no small degree, that's due to the Chinese government's stimulation package, which is also aimed at getting the local steelmaking industry back on its feet. That'll benefit the Chinese steelmakers rather than their international brethren; in such circumstances, it's better to be a seller of inputs rather than the finished product.

Labor peace is a wonderful thing to have if you're a large-scale manufacturer. The pact agreed by U.S. Steel with its union is indisputably a positive for it and, by extension, ArcelorMittal. Too bad the same can't be said for the current state of their core businesses.

Not all large American firms involved with steel are flagging, though. One very successful manufacturer that uses the stuff is Caterpillar, the market share leader in an industry in which size matters. Its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in our brand new report. Just click here to access it now.


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