Previously, we analyzed the recent trend in steel scrap and iron ore prices. In this part of the series, we’ll analyze how steel demand is shaping up in the US. The energy sector accounts for ~10% of total steel consumption in the US. Steel products used by the oil and gas industry are also collectively known as OCTG (oil country tubular goods).
Rig count falls more
The above chart shows the trend in the US rig count. According to oilfield service company Baker Hughes (BHI), there were 875 active oil and gas rigs in the US during the week ending May 29, 2015. There were ten less active rigs than in the week ending May 22. With last week’s fall, the US rig count hit its lowest level since January 24, 2003.
Negative for the steel industry
The declining oil rig count is negative for steel companies. U.S. Steel’s (X) tubular segment posted a massive decline in its 1Q15 shipments. Leading energy exploration (XOP) companies cut their capital expenditures for this year. Energy companies’ lower capex will likely turn into lower steel demand from the energy sector.
Higher levels of OCTG imports in the previous months, led by Korea (EWY), resulted in higher levels of OCTG inventory. According to estimates, markets are flooded with nine to ten months of OCTG supply. This is much higher than the long-term average OCTG inventory.
The OCTG segment has been hit hard by the combination of lower demand and higher inventory. This would put pressure on U.S. Steel and Nucor’s (NUE) tubular operations.
Meanwhile, the automobile sector has been a bright spot for steel companies. How did US auto sales fare in May? We’ll find out in the next part of this series.