Reuben Gregg Brewer, The Motley Fool
5 min read
In This Article:
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United States Steel is an iconic steelmaker, but it is no longer an industry leader.
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Nucor and Steel Dynamics are both built on more modern steelmaking technology.
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Nucor and Steel Dynamics both have stronger growth models then US Steel.
United States Steel's (NYSE: X) place in history is secure, given how important the company was to the creation of the steel industry. But US Steel is no longer the industry-leading company it once was. Here's what's going on with this iconic steelmaker, and why peers Nucor (NYSE: NUE) and Steel Dynamics (NASDAQ: STLD) will likely be worth more than US Steel in five years.
US Steel makes steel, but that's not really the important thing here. It is the way in which US Steel makes steel that's notable.
Although it has diversified its production processes, the business was built on blast furnaces. This is an older steelmaking technology that uses iron ore and metallurgical coal to create primary steel. This is still an important thing to do, but blast furnaces are only profitable when they are run at high utilization rates.
During steel industry downturns, when demand is weak and steel prices are low, blast furnaces tend to bleed red ink. This is why US Steel has been focused on building electric arc mini-mills, which use scrap steel and electricity to produce new steel products for sale. This technology is more flexible than blast furnace technology and can be ramped up and down with demand. Thus, electric arc mini-mills tend to have more attractive profit margins through the entire steel cycle.
This technology is what underpins the businesses of both Nucor and Steel Dynamics. It is the first, and most notable, reason why investors will likely be better off buying either of these two steel mills over US Steel. But there's more than just this foundational fact to consider.
The second big issue around US Steel today is that it is what's known as "in play" on Wall Street. Currently, there's a plan for the company to be bought out by a large Japanese steel mill (Nippon Steel). That deal has become a political football, so there's no telling whether it takes place.
If it doesn't, US Steel has other suitors waiting in the wings. But that doesn't mean a transaction will happen.
If US Steel gets bought by Nippon Steel or someone else, it will cease to exist as a stand-alone business. If it doesn't get bought out, it still has the problem of making primary steel using blast furnaces. Either way, investors are probably better off avoiding US Steel and buying either Nucor or Steel Dynamics, or both.
