Why global concerns drag down U.S. steel companies

Fear of a global slowdown

In the last part of the series, we analyzed the recent bloodbath in steel companies. In this part of the series, we’ll discuss some of the possible reasons for the slowdown.

As discussed previously, steel demand in the U.S. is expected to grow at a healthy pace. The current fall in steel companies’ stock prices is mainly a result of global factors. Over the past few weeks, the global data has disappointed markets. Economic data from China failed to cheer the markets. Inflation decreased in China. This reflects a demand slowdown in the Chinese economy.

Why global factors matter to investors

Global factors impact steel companies that operate in the U.S. They impact steel companies in multiple ways.

First, it creates a negative sentiment for a cyclical industry like steel. Second, some companies—like ArcelorMittal (MT)—get most of their revenues from outside the U.S.

The above chart shows the geographical breakup of ArcelorMittal’s 2013 revenues. As you can see, ArcelorMittal gets almost half of its revenues from Europe alone. Even U.S. Steel Corp. (X) has significant operations in Europe. So, while these companies’ U.S. operations are expected to do well, their international operations can slow their overall profitability.

U.S. faces the threat of cheap imports

Since steel is a global commodity, a slowdown in other parts of the world impacts steel prices. Steel prices in the U.S. are usually higher than rest of the world. The price difference makes U.S. markets ripe for steel imports.

The U.S. is the biggest steel importer. The cheap imports are one of the main threats that U.S. steel companies face. AK Steel (AKS) and Steel Dynamics (STLD) are some of the major steel companies in the U.S.

Another global factor that hit the U.S. steel industry is the slowdown in Europe. We’ll discuss this more in the next part of the series. Investors can also gain access to the steel industry through the SPDR S&P Metals and Mining ETF (XME)