US Steel Plant

The largest producer of steel in the U.S., United States Steel Corporation (NYSE:X) , reported a profitable first quarter after saying that low natural gas prices helped lower costs.  The company reported a profit of $0.67 a share (if you exclude the loss associated with the Serbian plant sale).  Sales were up 6% to $5.172 billion which exceeded the Street’s forecast of $4.949 billion.

Profit improved due to higher steel prices, lower natural gas prices and strong sales from the auto and oil industries.  Despite this, management pointed to a slow growth environment that is coming. US Steel CEO John Surma said that demand from the oil and natural gas industries could be slowing which is a big source of profits for the steel company. Luckily, auto sales have been strong and even the Big Three have said they can’t build cars fast enough to keep up with demand.  This could present a great opportunity for US Steel to capitalize on auto makers and help offset any losses in sales from the energy industry.

One of US Steel’s top competitors, AK Steel (NYSE:AKS) also reported earnings this morning and they did not fare as well as US Steel.  The company reported a loss of $0.22 a share during the first quarter, compared to estimates of a loss of $0.11 a share by analysts.  Sales fell 5% to $1.509 billion but slightly topped estimates of $1.504 billion.

As a bellwether for the US economy, the steel companies’ earnings are extremely important to determine the strength of the economy as well as growth.  Unfortunately, these are not the numbers you want to see if you are a bull and a believer in the recovery.

Interestingly enough, the energy industry’s demand for steel was slightly below estimates and could be going lower for both steel companies.  Despite the higher earnings oil companies are seeing right now, they have hinted to a slowdown in demand for steel.

The bottom line here is that steel companies still face some uphill battles.  US Steel had good and bad mixed in with their earnings report today. Unfortunately, AK Steel has a lot more work to do than US Steel after posting worse than estimated losses.  Higher steel prices will lead to slower demand which could be a drag for most of this year but at least natural gas prices are at multi-year lows, making it cheap for steel companies to operate.