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Analyzing the Steel Industry’s Demand-Supply Equation in 2016

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Demand-supply

August hasn’t been a happy month for US steelmakers (XME). U.S. Steel Corporation (X) and AK Steel (AKS), which have been among the best performing steel companies in 2016, have lost 27.3% and 29.7%, respectively, in August. Nucor (NUE) and Steel Dynamics (STLD) have lost 8.8% and 7.9%, respectively, in August.

Investors in the commodity space should pay close attention to the underlying demand-supply equation. Steel isn’t an exception. Demand-supply dynamics are a key driver of steel prices. Demand-supply dynamics can give us crucial insights into the outlook for commodity prices.

In this series, we’ll look at the recent US steel demand-supply indicators. This will help us understand what will likely drive steel prices as well as steelmakers in the coming months.

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Steel supply

We should note that US steel demand is met by domestic steel mills and imports. The US is the world’s biggest steel importer. Notably, one of the factors behind the massive fall in steel prices last year was higher imports. Also, steelmakers in the US were somewhat slow in adjusting their production levels. We saw major supply cuts from US steel mills in 4Q15—steel prices fell to historically low levels.

Falling imports have been a key driver of steel’s upward price action in 2016. It’s important for steel investors to follow the monthly steel import data releases. They serve as a virtual health check for the US steel industry. In the next part of the series, we’ll look steel import data from July.

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