Sell U.S. Steel, Citi Warns

• The share price of United States Steel Corporation X has declined 60.25 percent from a high of $26.59 on January 2.
• Citi’s Brian Yu has maintained a Sell rating on the company, while lowering the price target from $12 to $10.
• While expecting the challenging markets to persist, Yu mentioned that the company’s Q3 results and Q4 guidance were lower than expected.

Analyst Brian Yu reported that approximately 66-75 percent of United States Steel’s annual contracts in the US would become due for renewal on January 1, with the remaining due for renewal on April 1. 2016.

Yu stated that the company was “in negotiations with customers but with benchmark HRC prices sitting $200/ton below year-end 2014 levels, new contract pricing will likely reset lower with the magnitude a key factor in negotiations.”

On the other hand, the hard freeze undertaken by the company on its main pension, along with the changes in management benefits and the shut-down at Fairfield, were expected to lead to a $125 million year-on-year reduction in the pension expense for 2016.

However, any savings due to this and the 0.25 percent increase in the discount rate assumption will be more than offset by a $600 million reduction in the fair value of the company’s plan assets.

According to the Citi report, “With the deterioration of pricing and orders relative to prior expectations, full year EBITDA guidance was reduced from $700 mln to $225 mln.”

Yu believes that there could be further working capital reductions in future quarters, although it was not expected to “prevent cash burn at current steel prices.”

The 2015 EBITDA estimate has been lowered to reflect the Q3 results and the guidance, while the 2016 EBITDA estimate has been reduced to reflect continuing pricing and volume headwinds in the tubular business.