Falling oil rigs
Previously in this series, we’ve seen how the US rig count has fallen to its lowest level since October 2009. Rig counts tell you how many rigs are currently active for drilling. They’re an indicator of the oil and gas industry’s health. The energy sector is an important customer segment for U.S. Steel (X). Almost one-sixth of U.S. Steel’s revenues come from the energy sector. Almost 10% of Nucor’s shipments go to the energy sector. Nucor (NUE) forms 3.7% of the SPDR S&P Metals and Mining ETF (XME) and 2.6% of the Materials Select Sector SPDR ETF (XLB).
The chart above shows the contribution of the tubular segment to U.S. Steel’s revenues as well as operating profits. The tubular segment has been the most profitable segment for US Steel.
There are two main reasons why the tubular segment is the biggest contributor to US Steel’s profit. First of all, tubular operations generate higher profits per ton than other segments. Secondly, the flat-rolled segment, which is U.S. Steel’s biggest segment by revenue, was suffering from low profitability. However, there has been a turnaround in the flat-rolled segment under U.S. Steel’s Carnegie Way program.
Demand is down
The demand for tubular products has been negatively affected as a result of falling crude oil prices. This trend has negatively affected U.S. Steel’s tubular segment. Since U.S. Steel has a high exposure to the energy sector compared to other steel plays, it’s vulnerable to a decline in crude oil prices. Tenaris (TS) is another major supplier to the energy industry.
Even in this challenging market environment, U.S. Steel is taking bold moves to transform its operations. We’ll discuss this approach in detail in our next part.