Consumed by the oil and gas industry
Why falling steel prices should worry investors;
We looked at the key drivers for US Steel Corporation (X) in the previous part. In this part, we will see the key risks US Steel faces. Let’s begin by analyzing how the US steel industry is exposed to crude prices.
Tubular segment exposed to crude prices;
As discussed previously, tubular products are consumed by the oil and gas industry. While the overall growth in the steel industry has been modest, the tubular segment has been growing in double digits. This is driven by increasing oil and gas production in the United States. The above chart shows the rising crude oil production in the United States.
With high crude oil prices globally, it made economic sense to produce more oil through shale. With the fall in crude prices globally, it would not be viable to produce oil from some wells. This would also hamper further investments in this segment.
Oil companies make investments in new projects based on the long term outlook for crude prices. As of now, there has been no knee jerk reaction from energy companies to cut back their investments. It will be crucial to analyze what capital investment guidance these companies give for 2015.
Rising imports: The biggest worry for steel companies;
The biggest risk for steel companies in the United States is the tsunami of cheap imports. Steel companies such as ArcelorMittal, AK Steel and Nucor are suffering from these cheap imports. Though anti-dumping duties have been imposed on some products, imports are still at historically high levels.
