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Does Further Downside Await Cliffs Natural Resources?

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Part 3
Does Further Downside Await Cliffs Natural Resources? PART 3 OF 10

Could US Steel Production Continue Favoring Cliffs in 2017?

US steel production

Now that we’ve looked at US steel import data, let’s look at US steel production data. Cliffs Natural Resources’ (CLF) US segment supplies raw materials to US steelmakers, which is why keeping track of US (DIA) (DOW) steel production is important for Cliffs’ investors.

According to the World Steel Association, the United States produced 6.7 million tons of crude steel in April 2017, a rise of 1.8% compared to the same month last year.

Could US Steel Production Continue Favoring Cliffs in 2017?

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According to data released by the AISI (American Iron and Steel Institute), steel production increased for the second consecutive week to 651,000 tons in the week ended May 27, 2017. This was a rise of 0.7% year-over-year (or YoY). Year-to-date (or YTD), US steel production had risen to 36.4 million tons, a rise of 2.9% YoY.

Capacity utilization inching higher

For the week ended May 27, 2017, capacity utilization was 75.2%, higher than the previous week’s 74.7%. YTD, capacity utilization for the US steel sector was 74.4%, higher than the 72.1% at which the sector was operating in the same period in 2016.

Most of the industry has been operating below capacity utilization of 80.0% for the last few years. A level of 90% is usually considered healthy. Recently, however, utilization has started to pick up as import penetration has begun to fall.

Scope for improvement

There exists the potential for further improvement in capacity utilization. The further stemming of imports could be one of the major drivers of higher capacity utilization, which would lead to lower unit costs, benefiting companies such as AK Steel (AKS), U.S. Steel Corporation (X), Nucor (NUE), Steel Dynamics (STLD), and ArcelorMittal (MT). In turn, this could benefit Cliffs Natural Resources.

It’s also important to consider trends in US steel demand. We’ll discuss this in detail in the next article.

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