Commodities

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

With Detroit found wanting, the onus of making United States Steel Corp. great again falls even more heavily on Washington D.C.

U.S. Steel, you may recall, last week sprung a savage earnings miss and profit warning on investors. On the less-than-chummy analyst call discussing all this, the company defended its results as taking the pain now, in terms of downtime and extra spending, in order to better capitalize on strong demand and pricing to come. The 27 percent drop in the stock price that day (and the further decline since) suggests it was not an entirely convincing argument:

Scrapped
U.S. Steel's stock has slumped in the past week
Source: Bloomberg

One of U.S. Steel's critical end markets is the automotive industry. Factoring out the roughly one-third of the company's production that goes to resale or for further processing, about a quarter of U.S. Steel's output went directly to the transportation industry last year. In response to an analyst question raising doubts about end-market prospects, CEO Mario Longhi said:

Take automotive. I think even though it may not be at the level of what it was last year ... it's still going to be fairly high, and our opportunity in that market is ... substantial.

Tuesday's release of U.S. vehicle sales figures for April certainly backed up the first part of that answer, as the industry racked up its fourth decline in a row and manufacturers missed already-bearish forecasts:

Braking News
The six biggest carmakers in the U.S. all missed forecasts for sales growth in April
Source: Bloomberg News
Note: Year-over-year change.

Overall, the pace of automotive sales has slowed sharply since the start of the year:

Sometimes It Slows In April
U.S. light-vehicle sales have dropped sharply in 2017
Source: WARD's Automotive Group
Note: Seasonally-adjusted annual rate. Data for April 2017 are preliminary as of 1.30PM ET on May 2nd.

The big question here is whether auto sales are plateauing -- a fairly common sentiment expressed by sector analysts -- or if we are witnessing a standard cyclical downturn that will take sales down further. On this front, four months of bad data aren't definitive, but similarly unexpected weakness in consumer spending and gasoline consumption aren't good signs.

Moreover, General Motors Co. last week reported a large build-up of inventory in the first quarter -- which looks prudent if you expect a bumper second quarter but presumptive if April's figures are more representative of where things are going. Overall, the North American vehicle industry's inventory hit 77 days' worth of sales at the end of March, according to Bloomberg Intelligence, up from 70 at both the start of 2017 and a year before. Given Detroit's natural instinct is to move metal rather than park it, this overhang could weigh on pricing -- and production lines.

For U.S. Steel, this reinforces its reliance on another message that was front-and-center on its earnings call; namely, that President Trump has its back. The company focused on the administration's move to institute protectionist measures favoring domestic steel producers.

Beyond this, however, investors have also clearly been expecting the new government to boost U.S. Steel's bottom line via specific things like building a steel-heavy wall on Mexican border and unleashing animal spirits in general. Such sentiment, combined with a surge in vehicle sales in the second half of 2016, led to big revisions in earnings forecasts, price targets and, of course, the stock itself:

Forging Ahead
Combined, Ebitda estimates for U.S. Steel in 2017 and 2018 increased by $1 billion, or 57 percent, between November 8th and its profit warning
Source: Bloomberg
Note: Consensus forecasts.

Granted, U.S. Steel's relatively high fixed costs make it an obvious reflation play. Even so, that is a lot of faith to put in a border wall that even congressional members of the president's own party aren't backing wholeheartedly, along with the ability of any administration to quickly juice the complex machinery of the U.S. economy. As it stands, confusion over healthcare policy, skimpy tax-reform plans and (from way over in left field) even a potential increase in gasoline taxes serve to remind us all that this governing thing is difficult.

With one major customer segment showing signs of stalling, U.S. Steel best hope Washington's gears stop grinding. 

Update: An earlier version of this column referred to U.S. Steel CEO Mario Longhi Filho as Mario Filho.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in New York at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net