Does Service Center Activity Show a Turnaround for US Steel?
Service center activity
Service centers are estimated to supply more than a quarter of the total steel in the United States, making them an important distribution channel for ArcelorMittal (MT), AK Steel (AKS), and Nucor (NUE). In 2014, U.S. Steel Corporation (X) apparently reorganized its business operations to have a business vertical focused on service centers.
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Service centers have been on a destocking spree for the last couple of years. As a result, the apparent demand in the United States was lower than the real demand in 2015 and 2016. We can define real steel demand as the steel consumed by end users, while apparent demand also accounts for changes in inventory. If end buyers decrease their inventory levels, apparent demand falls below real demand, and vice versa.
Steel companies were expecting an inventory restocking in 2017. However, we didn’t see any major restocking activity in the first half of the year, and inventory levels fluctuated largely sideways. But in July, service center steel inventories rose 3.9% compared to the previous month and rose to the highest level since September 2016.
An increase in supply chain inventories could be a key driver for steel stocks in the coming months. Notably, US steel markets went into a wait-and-watch mode in June as the markets awaited the findings of the Section 232 imports probe that was ordered by the Trump administration earlier this year. Since the findings might take more time than the markets previously anticipated, some activity seems to have returned to the steel markets (STLD).
US steel demand indicators have shown some signs of moderation. We’ll take a look at that in the next part of this series.