Key drivers for steel plays
Towards the end of 2013, Goldman Sachs (GS) upgraded the US steel industry to neutral. Before the rating change, Goldman Sachs had a sell rating on steel companies. Steel companies delivered decent returns later in the second half of 2013.
Adverse weather conditions
However, 2014 didn’t start on a positive note for steel plays. The US faced one of the most severe winters in recent history. This led to unplanned outages at some of the steel plants. According to ArcelorMittal (MT), weather-related expenses were $150 million in the second quarter. This was a negative impact. U.S. Steel Corp. (X) also incurred the same expenses for various shutdowns and repairs. The shutdowns and repairs were associated with these disruptions.
Nucor (NUE) benefited from the disruptions at its customers’ manufacturing facilities. It was able to acquire customers from its competition. Currently, Nucor and Steel Dynamics (STLD) are the top holdings of the SPDR S&P Metals and Mining ETF (XME).
Strong steel demand
According to estimates, steel demand in the US grew by ~5% in 2014. Please be aware that final steel consumption figures will be released sometime in 2015. The above chart shows the steel consumption forecast. The World Steel Association released the forecast in its short-term outlook.
In 2014, the growth in US steel consumption was led by strong demand from end consumers of steel. Steel demand from the automobile and construction sector kept the steel plays’ orderbooks in good shape.
Also, there were positive developments on the trade actions filed by steel companies. The anti-dumping duty on the import of oil country tubular goods, or OCTG, was a big relief to steel plays.
Towards the end of 2014, the cycle turned upside down for the steel industry. In the next part of this series, we’ll discuss why the cycle turned upside down.