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Why US Steel Shipments Could Stay Weak in 2016

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2016 steel shipments

Previously in this series, we discussed how steel companies including U.S. Steel Corporation (X), AK Steel (AKS), Nucor Corporation (NUE), and Steel Dynamics (STLD) reported steep falls in their 4Q15 shipments. The downtrend in shipments, which began at the start of 2015, only intensified as the year drew to a close. But will 2016 be any better? What if this downtrend in shipments continues? Let’s explore.

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Weak note

US steel production has been weak so far in 2016. Domestic steel production has fallen by 8% YoY (year-over-year) in January. It’s still much better than the ~20% decline in December steel production. Nonetheless, the slowdown in US steel production will likely reflect in steel companies’ 2016 shipments.

Buyers on the sidelines?

While spot steel pricing have been increasing, encouraging more steelmakers to sell steel in the spot market, it seems that buyers are still on the sidelines. Many steel buyers doubt the stickiness of the recent price hikes and expect that prices might not sustain at higher levels. This uncertainty in steel buying could lead to further declines in supply chain inventory.

Moreover, service center steel inventory continues to fall. In December, metal service center steel inventory stood at 8.3 million metric tons. This represents a 16% YoY decline. Compared to November, service center inventory fell by about 3%. You can look at the falling trend in service center steel inventory in the graph above.

Don’t hold your breath

In December, US service centers shipments fell 11.4% YoY. Lesser steel shipments represent muted steel demand, so we could see US steel companies report YoY falls in steel shipments in 1Q16 as well. Beyond that, we’ll have to wait and see how steel imports shape up.

Investors looking to diversify the risk of investing in a single security might consider the SPDR S&P Global Natural Resources ETF (GNR). Almost a quarter of GNR’s holdings are invested in steel and other metal companies.

Now let’s explore how different steel companies’ average selling prices played out in 4Q15.

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