Must-know: Why capacity utilization affects steel producers

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Oct. 29 2019, Updated 11:53 p.m. ET

Capacity utilization and industry rivalry

In simple terms, the “capacity utilization rate” refers to the actual production compared to the maximum production possible through existing plants. With lower capacity utilization rates, competition between existing industry players increases. This pressures prices as producers try to increase their sales to reach optimal capacity utilization rates. Running plants at less-than-optimal capacities also increases production costs. The reasoning is quite intuitive. The fixed costs are distributed among fewer units, so per-unit costs rise.

A pulse of industry health: Relation with prices

The capacity utilization rate is a key indicator of the steel industry’s health.

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As the graph above shows, steel prices have been moving in tandem with capacity utilization rates. Steel prices are a key factor impacting the performance of steel companies. U.S. steel prices have been quite range-bound over the past couple of years, as you can see from the graph above. Steel prices directly impact revenues for companies like Arcelor Mittal ADR (MT), United States Steel Corporation (X), Nucor Corporation (NUE), and Reliance Steel & Aluminum (RS). ETFs like the SPDR S&P metals and mining index (XME) are also affected.

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