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Why the May Inventory Report Should Bother Steel Investors

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May inventory report

In the previous parts of this series, we explored the strength of the US housing market. The strong demand from the housing sector, which is the largest consumer of steel products, should benefit steel companies. However, the May inventory report for steel shipments paints a gloomy picture of the steel industry. The data are released on a monthly basis by the Metals Service Center Institute.

In May, service center steel shipments fell 12.6% year-over-year. Shipments have also fallen in all months of the current year.

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Please note that service centers are an important distribution channel for steel companies like AK Steel (AKS) and ArcelorMittal (MT). According to estimates, almost a third of the total steel consumption in the United States (SPY) is supplied by service centers. Reliance Steel & Aluminum (RS) is the largest service center in North America. It currently forms 0.30% of the iShares Core S&P Mid-Cap ETF (IJH).

Inventories decline

The above graph shows the trend in metal service center inventories. Steel inventories peaked at 9.9 million tonnes (or Mt) in December 2014. They’ve fallen in all months of the current year. Steel inventory stood at 9.34 Mt in May, a fall of 1.46% over April. At the current run rate, this represents 2.8 months of supply.

The fall in steel shipments is possibly due to a lower demand for OCTG (oil country tubular goods). Demand for OCTG products, which are used in the energy industry, has been hit hard since the US rig count has reached a 12-year low.

Metal service center inventories surged toward the end of 2014. Cheap imports from countries like China are behind this massive inventory buildup. So how is the Chinese steel industry doing? We’ll find out in the next part of this series.

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