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Can More Capacity Utilization in US Steel Industry Help Cliffs?

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US steel production

In the previoius part of this series, we looked at US steel imports in 2016. In this part, we’ll look at the weekly US steel production data released by the AISI (American Iron and Steel Institute).

US (SPY) steel production is a very important volumes driver for Cliffs Natural Resources’ (CLF) US Iron Ore segment.

According to data released by the AISI, US steel production fell 2.7% YoY (year-over-year) in the week ended December 31, 2016. Prior to that, US steel production registered YoY rises for the last five weeks.

For 2016, there was a YoY fall in production. There were 87.9 million tons of steel produced, a fall of 0.50% YoY. It was the second consecutive annual fall. The fall was mainly due to subdued domestic demand and higher import penetration.

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Is capacity utilization picking up?

It’s important for US steel investors to watch the capacity utilization ratio of the industry. Most of the industry has been operating below capacity utilization of 80.0% for the last few years. It’s much lower than the 90.0% that many market participants consider healthy. It has, however, recently started picking up as import penetration has started falling.

For the week ended January 21, 2017, the utilization was 71.8% against 68.7% in the corresponding week last year. The capacity utilization in 2016 was also slightly higher at 70.8% in 2016 compared to 70.1% in 2015.

Changing dynamics

Utilization is slowly inching upward. President Donald Trump’s infrastructure push could support steel production growth in the United States going forward. Trump reaffirmed his view that pipeline makers should use domestic US steel. The CEO (chief executive officer) of United States Steel told CNBC that his company and other US steelmakers are “absolutely” ready to supply steel for the pipelines.

Some analysts expect a steep rise in US steel demand under Trump’s presidency. Companies such as United States Steel (X), ArcelorMittal (MT), Nucor (NUE), and Steel Dynamics (STLD) could benefit from higher shipments going forward. That would, in turn, benefit Cliffs Natural Resources.

Next, let’s see how the drivers for steel demand are shaping up in the US steel market.

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