The impact of falling crude prices on steel companies
The energy sector, which has been buoyant due to shale discoveries and rising production of crude oil, accounts for 10% of steel consumption in the US. The production of shale gas is not only about the nation’s energy security, it has also led to increased demand for steel to construct rigs and pipelines. The steel products that the energy industry uses are also known as oil country tubular goods (or OCTG). US Steel (X) is the biggest supplier of these goods in North America.
Nucor (NUE) recently acquired Gallatin Steel from ArcelorMittal (MT). Nucor expected Gallatin Steel to strengthen Nucor’s presence in energy markets. Currently Steel Dynamics (STLD) and Nucor are among the top holdings of the SPDR S&P Metals and Mining ETF (XME).
Rising crude production in the US
The chart above shows the crude oil production by various regions. As you can see, the crude production has grown by almost 50% between 2008 and 2013. This led to an increase in demand of OCTG products.
OCTG products sell at higher prices compared to other steel products and are a high margin business for steel companies. This should have been a golden opportunity for steel companies in the US, but a tsunami of imported steel spoiled their party. The US was importing almost half of its OCTG requirement.
The International Trade Commission (or ITC) recently ratified an anti-dumping duty on the import of OCTG products from nine nations. Credit Suisse doubled its price target for US Steel to $50, which is indicative of the importance of the ruling.
But why are OCTG products so important for US Steel? The next article will address this question.