Steel demand from energy sector
Previously, we have noted that most steel demand indicators in the United States look strong. However, the steel demand from the energy sector has been pretty weak. Please note that the energy sector usually accounts for ~10% of the total US steel production.
However, falling crude oil prices have taken their toll on energy (XLE) companies’ capital expenditure budgets. The US rig count is hovering near multi-year lows. Less demand from the energy sector has negatively impacted the demand for tubular steel products. U.S. Steel (X), Allegheny Technology (ATI), and Tenaris (TS) are among the leading suppliers of tubular products to the energy sector. U.S. Steel’s tubular shipments fell more than 80% year-over-year in 2Q15.
US steel production
According to the data released by the AISI (American Iron & Steel Institute), as of August 22, US steel production fell 7.8% compared to the corresponding period last year. The chart above shows the recent trend in US steel production.
The US steel industry’s capacity utilization ratio fell to 72.6% in the week ended August 15, compared to 78% last year. A ratio of 80% is generally regarded as a healthy sign for the industry. A lower capacity utilization ratio negatively impacts the profitability of steel companies.
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 (XME).
There doesn’t seem to be an early solution to the energy industry’s woes. The struggling energy industry will continue to pressure U.S. Steel’s earnings. In the good old days, U.S. Steel’s tubular segment used to be its most profitable segment. However, in 2Q15, the segment generated a negative EBIT (earnings before interest and taxes) of $717 per ton. That’s quite a lot of money to lose on a per ton basis.
Steel production has fallen globally also. We’ll discuss this in detail in the next part of this series.