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Flat rolled iron accounts for nearly 70 percent of U.S. Steel's total EBITDA in 2016 and the company benefited from European prices which were boosted from higher Chinese prices, Rassouli commented in his downgrade note (see his track record here). But now U.S. Steel's "material exposure" to spot flat-rolled prices should have investors concerned as nearly 60 percent of the U.S. flat-rolled segment is exposed to any move in the spot market.
Moreover, U.S. Steel's vertically integrated iron ore supply structure adds another headwind to the story, the analyst continued. The company should be seen as an "undercover iron ore play" because when iron ore prices rise, steel prices normally follows the lead and the company benefits from the fixed price of its internally sourced iron ore."This enables margins to expand more rapidly than a steel mill that is having to buy iron orein the open market," the analyst explained. "The issue is that when iron ore prices are falling, the company does not benefit from the reduction in input costs that a mill which is short iron ore would be able to achieve.
Bottom line, a decline in HRC prices would prove to be "detrimental" for U.S. Steel's overall earnings power due to its "significant" contribution from the segment.
Related Links:Barclays Grows More Confident In US Steel, While AK Steel Estimates SoftenJPMorgan Not Bending On Bull Call For US SteelCrypto Whales Are Loading Up — Are You?
New research shows the biggest crypto buyers are back. And this time? They could hold for the possibility that Bitcoin will surpass $100,000 in 2024. You don’t want to miss the next massive crypto bull run like we saw in 2020 and 2021. To know exactly what’s going on and what to buy… Get Access To Benzinga’s Best Crypto Research and Investments For Only $1.