Must-know: Why it makes sense to hold on to steel companies (Part 4 of 6)
Steel companies have benefited from the shale boom
The energy sector accounts for 10% of steel consumption in the U.S. The sector has been buoyant—driven by shale discoveries and the rising production of crude oil. The production of shale gas isn’t only about the nation’s energy security. It has also led to increased demand for steel for making rigs and pipelines. U.S. Steel Corp. (X) is the biggest supplier of these goods in North America, which are collectively also known as oil country tubular goods (or OCTG).
Rising crude production in U.S.
The previous chart shows the crude oil production by various regions. The crude production has grown by almost 50% between 2008 and 2013. OCTG products sell at higher prices compared to other steel products and are a high margin business for steel companies. This should have been a golden opportunity for steel companies in the U.S., but there was a tsunami of imported steel spoiled. The U.S. imported almost half of its OCTG requirement. As a result, domestic industry was impacted.
Why the steel companies expect demand to increase
The energy production in the U.S. is expected to continue its upward trend. The volatile Middle East and elevated crude oil prices are expected to keep crude production high in the U.S. The biggest challenge for steel companies hasn’t been steel consumption by energy companies, but the impact of cheap foreign imports. In our next article, we’ll discuss the remedial measures taken by the government to bail out the domestic steel industry.
It’s important to note that Arcelor Mittal ADR (MT), Nucor Corporation (NUE), and Steel Dynamics (STLD) are a few major listed steel companies in the U.S. Along with listed steel companies, exchange-traded funds (or ETFs) like the SPDR S&P Metals and Mining ETF (XME) are also an alternative way to gain exposure to the steel industry.
Browse this series on Market Realist:
- Part 1 - Must-know: An investor’s guide to the steel industry
- Part 2 - Why a construction increase is a key driver for steel companies
- Part 3 - Must-know: Why auto sales put steel companies in top gear
- Basic Materials Industry
- Commodity Markets