Steel company analysis

The purpose of this paper is to provide a comparative financial analysis of two US based publicly traded companies. This paper will primarily use information gathered from the companies 10-K’s as well as other industry relevant information. This analysis will help us understand the current financial position of each company as well as predict future profitability. By using ratio calculations, evaluation of the financial statements, and observing trends we hope to be able to select which company is more fiscally sound.

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Steel consumption is highly cyclical and usually follows general economic conditions both worldwide and here at home. The steel industry has been historically plagued with excess world supply, which has led to lower steel prices during times of economic weakness. Steel consumption in China and other developing countries has increased at a rapid pace and steel companies have responded by drastically increasing steel production capacity. Any excess Chinese capacity could have a major impact on world steel prices and trade. This adverse price reduction would directly affect the profitability of both AK Steel and US Steel.

1 Steel imports to the United States were at an all time high in 2006 accounting for 31% of the domestic steel market. The ITC (International Trade Commission) recently decided to end the duties on corrosion resistant steel from Australia, Canada, France and Japan. Price reductions on corrosion resistant steels will occur if high levels of imported steel continue or even increase. Because a significant portion of both AK and US Steel’s products are flat steel corrosion resistant, such imports have the potential to impact net sales and thus its net income and cash flow.

1 In 2006, US Steel had 109,000 current and retired persons receiving pension and / or medical benefits. US Steel’s under funded benefit obligations for retiree medical and life insurance were $2. 2 billion at the end of 2006. AK Steel is in the same situation where the company is self-insured with respect to all of its health care coverage. Health care costs continue to escalate and as a result will adversely affect the company’s ability to provide those benefits. AK Steel’s pension trust is also under funded to meet its long-term obligations.

This was primarily due to lower than expected returns on investments as well as falling interest rate in that same period. 2 Many international and domestic competitors do not provide retiree and life insurance benefits and pensions for their employees. This will give the competitors a significant competitive advantage during times of low profit. Both US Steel and AK Steel have legal and contractual obligations to fund these plans and this will have a negative effect on cash flows. Until just a few years ago, there were more than a dozen integrated steel companies in the United States.

Unfortunately, many of these companies went bankrupt and their assets were purchased from bankruptcy hearings by a holding company called ISG for pennies on the dollar. Also, unfortunate for US Steel and AK Steel is that that ISG basically started over without the legacy, remediation and legal obligations that are still plaguing both US Steel and AK Steel. ISG has since completed a merger deal with Arcelor-Mittal. Risk factors listed in the US Steel Corp. 2006 10-K state, “Mini mills typically require lower capital expenditures for construction of facilities and have lower employment costs.

Some mini mills utilize thin slab casting technology to produce flat rolled products that are increasingly able to compete directly with integrated producers of flat rolled products. ” 1 Steel producers require large amounts of raw material. Worldwide increases in steel production have created limited availability and higher prices of critical raw materials like iron ore, steel scrap, coke, coal and Zinc. 1 After careful consideration and a through financial analysis it has been determined that investing in the United States Steel Corporation would be the better investment.