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How the Decline in Steel Production Impacts Steel Companies

Mohit Oberoi, CFA - Author

Apr. 11 2015, Updated 2:06 a.m. ET

Decline in steel production

Previously, we discussed the trends in steel and steel scrap prices. Investors should also understand the supply side dynamics of the steel industry. In this part, we’ll analyze the latest steel production data. The American Iron and Steel Association (or AISI) releases weekly steel production figures. It also releases the capacity utilization rate in the steel industry.

The capacity utilization ratio represents the actual production as a percentage of total installed production capacity. It’s a key metric for investors in the metals and mining industry. The SPDR S&P Metals and Mining ETF can give you diversified exposure to this sector. Nucor (NUE) and Commercial Metals Company (CMC) each forms ~3.7% of XME.

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Steel production falls further

The previous chart shows steel production in the United States. Steel production up until April 4, 2015, is down 6.3% over the corresponding period last year. The decline in steel production is negative for steel companies in the US.

The capacity utilization rate in the US steel industry has also dropped as compared to last year. Capacity utilization rate on April 4 stands at 72.9% as compared to 77% over the corresponding period last year.

Fall in steel production is a negative for companies

The profitability of steel companies like US Steel (X) and Companhia Siderurgica Nacional (SID) is negatively impacted when they operate at less-than-optimum capacity. Lower production, coupled with lower capacity utilization ratio, could have a negative impact on steel companies’ 1Q earnings. Steel Dynamics (STLD) is expected to release its earnings on April 20. It currently forms 0.79% of the iShares US Basic Materials ETF (IYM).

Along with steel production, investors should also track how steel demand is shaping up. We’ll discuss this in detail in our next part.


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