Previously, we discussed how the steel demand from the construction and automobile industries could remain strong for the remaining part of the year. However, the same cannot be said about demand from the energy sector. The US rig count, which is a measure of the energy industry’s health, has been on a downward spiral since November 2014.
You may recall that on November 26, OPEC (Oil Producing and Exporting Countries) decided against reducing their daily oil output. Crude oil prices have crashed since then, only to recover somewhat in March. However, the steep decline in crude oil prices has taken its toll on the US energy sector (XLE).
Rig count has fallen from its peak
The above chart shows the total US rig count, based on data released on a weekly basis by Baker Hughes. The rig count has come down by more than 55% since November, hitting the lowest level since 2003. The decline in energy prices has prompted energy exploration (XOP) companies to slash their capital expenditure budgets.
The reduction in capex (capital expenditure) by energy companies has been especially negative for companies like US Steel (X) and Tenaris (TS). These companies are leading suppliers of OCTG (Oil Country Tubular Goods) to the energy sector. Allegheny Technologies (ATI) also supplies high-strength alloys to the energy sector.
Rig count rises marginally
After falling for 28 straight weeks, the US rig count has increased for two consecutive weeks now. However, the steel demand from energy sector could still remain under pressure for the next few quarters. US Steel would also experience these pressures, and its OCTG operations comprised the company’s most profitable business segment.
The OCTG segment, as well as the entire US steel industry, has been under severe pressure following the tsunami of imported steel products. However, in the May reading, US steel imports have come down. We’ll discuss this in the next part of this series.