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On Aug 7, we upgraded largest integrated U.S. steel producer U.S. Steel (X - Analyst Report) to Neutral. While the company remains challenged by weak steel market fundamentals, it should benefit from lower raw material costs in the third quarter.

Why the Upgrade?

U.S. Steel turned in a loss in second-quarter 2013, reported on Jul 29. But loss per share was narrower than the Zacks Consensus Estimate. Revenues fell by double digits year over year and missed the Zacks Consensus Estimate. The results were impacted by ongoing pressures from the lockout at the Lake Erie Works. The company sees improved results across its flat-rolled and tubular businesses in the third quarter.

U.S. Steel is looking for opportunities related to the availability of reasonably priced natural gas as an alternative to coke in the iron reduction process to improve its cost competitiveness while reducing its dependence on coal and coke in the long term.
U.S. Steel is also expanding its coke-making capabilities. The company has taken a number of steps in order to ensure long-term access to high quality coke for its blast furnaces.

Moreover, U.S. Steel is seeing strong demand in the automotive space. Its partnership with specialty alloy maker Carpenter Technology Corporation (CRS - Snapshot Report) to develop lighter high-strength steel for automotive applications will usher in incremental opportunity in the automotive market. U.S. Steel should also benefit from lower raw material costs in the third quarter resulting from a decline in iron costs.

However, macroeconomic concerns, slowing growth in emerging markets, and a sluggish construction market are still weighing on U.S. Steel’s prospects. Oversupply in the steel industry and increased domestic imports still remain headwinds.

U.S. Steel currently carries a short-term Zacks Rank #3 (Hold).

Other Stocks to Consider

Other steel producers with favorable Zacks Rank are Nippon Steel & Sumitomo Metal Corporation and Ternium S.A. (TX - Snapshot Report). Both maintain a Zacks Rank #1 (Strong Buy).

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