No Respite for the US Steel Industry: Production Declines More



Steel production

Previously, we discussed how steel and steel scrap prices consolidated in April. However, US steel production has been on a downward journey this year. The AISI (American Iron and Steel Association) releases weekly steel production figures. During the week ending May 2, US steel production was 1.71 million tonnes—a decline of 7% compared to last year. YTD (year-to-date), US steel production is down 6.9% on a YoY (year-over-year) basis.

Capacity utilization ratio

The AISI 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 (XME) can give you diversified exposure to the metals and mining industry. Reliance Steel & Aluminum (RS) and Allegheny Technology (ATI) each form ~4% of XME.

Capacity utilization in the US steel industry stood at 72.9% in the week ending May 2, 2015—compared to 77% in the same period last year. This can be seen in the previous chart. However, the utilization ratio improved after hitting a low of 68% in early April.

Negative for steel industry

Steel companies like U.S. Steel (X) and AK Steel (AKS) have a high fixed cost structure. They’re impacted severely when capacity utilization rates decline. Both of these companies posted a loss in the first quarter. Nucor and Steel Dynamics use electric arc furnaces for producing steel. They managed to remain profitable in the first quarter.

The construction sector is the largest consumer of steel products. In the next part of this series, we’ll analyze the latest trend in US construction spending.

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