US Steel Cites Improved Demand; But From Where?

If you are into scouring the economic landscape for signs of good news - and by good news we don't mean second derivative technicalities - then you may have noticed the limited yet positive news from US Steel (X), which stated in it's recent earnings announcement that it will be increasing production capacity to meet demand from new orders. This news was initially denounced as entirely "stimulus" related; an assertion that may have overlooked some relevant facts. Below is what we know for certainty regarding US Steel's latest move:

1. The particular facility that has benefited from the capacity increase is Granite City Works, located in southern Illinois.
2. Granite City produces hot rolled, cold rolled, and coated sheet steel product for the "construction, container, piping & tubing, service center, and automotive industries.

From here we can basically rule out several industries as the source of new demand. Statements made by the Company's Chairman and CEO John Surma during the Q2 conference call would indicate that Tubing was not a bright spot for the Company during the most recent quarter:

"This severe downturn was primarily driven by the combination of lower demand due to reduced drilling activity, and extremely high inventory levels in the tubular supply chain caused by unprecedented levels of unfairly traded and subsidized Tubular imports from China. The Tubular results also reflects idle facility carrying cost of approximately $25 million and lower cost to market adjustments."

Additionally, the Census Bureau's latest report on construction starts doesn't indicate much of any uptick in construction spending.

That leaves the automotive industry as the most likely candidate. A comparison between April and May of 2009 light vehicle sales numbers shows that GM, Ford and Chrysler logged month-to-month increases of 11%, 20%, and 3% respectively. Furthermore, we would suspect that the automakers anticipated a successful running of the "Cash for Clunkers" program, which in fact nearly exhausted it's $1Billion budget in one week alone.

With the source of US Steel's fresh demand likely identified, the question becomes whether this demand is of a sustainable nature. That depends. It's probable that the White House will rush to extend funding for what has turned out to be the most popular stimulus extravaganza as of yet. Unfortunately, this program could simply lead to a double-dip style decline in new car sales, as anyone who has remotely considered buying a new car will likely take advantage of the government's recent auto largess. The best hope for US Steel et.al is that, by the time "Cash for Clunker" demand begins to fade, additional rounds of stimulus money will have found their way into the real economy. For now, that appears to be the best hope. Sphere: Related Content